Traditional IRAs can have a powerful impact on your estate. Years of saving, careful

planning, and knowledge of how your assets will transfer to your beneficiaries after

your death can help you create the estate plan you desire and provide the maximum

financial enefit for your heirs. Naming the beneficiary of your IRA is an important

part of estate planning. In most cases, naming a trust as the beneficiary of your IRA

would not provide the optimal financial strategy for your heirs an instead may hinder

the financial benefit.

Some disadvantages of naming a trust the beneficiary of your IRA:

1) Risk of losing the stretch payout benefit of your IRA

One of the greatest benefits of inheriting an IRA is having the ability to stretch out

the payments and tax advantages of the account which can give the funds extra years

and potentially decades of income-tax deferred growth. If you choose to name a trust

as your IRA beneficiary, instead of an individual, you will have one beneficiary of your

IRA: the trust. This could limit the benefit of the stretch payout for your

beneficiaries.

For an IRA to be distributed through a trust and be able to take advantage of the

stretch payout, the trust beneficiary must be a person with a birthdate and life

expectancy. To accomplish this, you will want to establish what is called a

"see-through" trust. This type of trust is set up to “see through” the trust as the

beneficiary, to the individual beneficiaries of the trust for the purposes of determining

the required minimum distributions. If you have multiple individuals as beneficiaries

to the trust, the retirement assets will be subjected to required minimum distribution

(RMD) payouts using the life expectancy of the oldest beneficiary of the trust causing

the younger beneficiaries to have less advantage of the stretch payout benefit. There

are ways to get around having to use the oldest beneficiary’s life expectancy by making

sub trusts. This will add to the complexity and cost of the trust. Establishing the “see

through” trust is complicated and commonly done incorrectly. The trust will need to

meet the following requirements outlined in IRS Regulation Section 1.401(a)(9)-4, A-

2) Additional Costs

The retirement benefits will most likely be taxed sooner and at a higher rate.

The cost of a trustee to oversee the management and distribution of the funds.

A separate tax return for the trust will need to be filed annually.

Situations where you may want to name a trust as the beneficiary of your IRA:

You want to have more control over the distribution of your tax-deferred money after you die.

To better protect the assets of a surviving spouse. The spouse can use the funds as needed, but will not be able to change the beneficiary, ensuring the assets will go to the children and not another individual.

For the benefit of an individual who is unable to be trusted with money.

If a beneficiary is a minor, disabled, or vulnerable to financial predators.

To secure funds for payment of estate taxes.

To fund charitable bequests.

To insure the IRA funds are protected from creditors and bankruptcy.

Generally, it is recommended that your spouse be named the primary beneficiary of

your IRA, which will enable it for a spousal rollover. This way, the spouse will be able

to take advantage of the stretch pay out using their own life expectancy.

Using a trust is usually not necessary, unless you have a very significant estate. If you

decide that naming a trust as the beneficiary of your IRA is appropriate for you, it is

good practice to seek the advice of an attorney. Trusts are complicated and should be

drafted carefully with knowledge of proper IRA terms so that it will not conflict with

IRS rules. Once the trust is in effect, any mistakes in the set up will not be able to be

changed and can be costly to the heirs you intended to benefit.

Carol Chaudet

(Updated 1/11/2018)