Many readers have reached out about my weekly articles regarding estate planning and using trusts in particular. For obvious reasons, including control, privacy, asset protection, etc., many clients are interested in putting assets into a trust. For many retirees, their IRA is among their biggest assets. It’s only natural then to want to put the IRA into a trust. While you’re alive, you simply can’t put it into a trust. Your IRA is your asset and as such, cannot be held jointly with another person or put into a trust. However, once you pass on the asset, your trust can be named the beneficiary of your IRA. But just because it can be doesn’t mean it should be. Today I thought we’d cover the pros and cons of naming your trust the beneficiary of your IRA.
So we have established that you can’t do it while you’re alive unless you take out all the funds and deposit them into your trust. This is almost never a good idea since funds coming out of your IRA are subject to income tax and could end up costing you a lot of money. So when would you want to consider naming your trust the beneficiary of your IRA? Here are a few reasons to consider it:
1. Second marriages where you want your spouse to have income but not the balance of the principal after their gone. This is a sticky topic, but sometimes when a second spouse gets the funds, they change the beneficiary to their own children from a previous marriage especially if they don’t have a great relationship with your children.
2. Control of your beneficiaries spending. The stretch IRA was a great idea, but many beneficiaries accelerated those payments to a shorter time period or worse yet to a single lump sum. In addition, the SECURE Act, which was passed in December, has changed the ability to stretch an IRA for many beneficiaries. If you would like to control your beneficiaries’ spending, you could name your trust the beneficiary and the trust would dictate the terms by which they could take out the money.
3. Minor or disabled children. I have a trust because my children are too young to inherit funds directly. In the case of disabled children, an outright inheritance could disqualify them from Federal benefit programs.
4. To skip a generation. Maybe you want those funds to go to grandchildren instead of your kids. A trust as a beneficiary can facilitate that.
5. Creditor protection for your heirs. The funds in the trust are not subject to the claims of your heirs’ creditors the way they are with an outright inheritance.
There are several other reasons, but these cover some of the bigger ones.
So why would I not want to name my trust as the beneficiary of my IRA?
1. You will not save on taxes by naming your trust as your IRA beneficiary. A trust provides no tax benefit.
2. Trusts incur expenses such as trustee fees, and tax rates on funds left inside the trust but not in the IRA can be substantially higher than personal income tax rates depending on the beneficiary.
3. You have to keep the trust going for years after your death. That means tax returns, more fees, and simply the logistics of maintaining it including having the trustee obligated for years after you’re gone.
4. Some custodians (the company that actually holds your money) simply won’t allow a trust to be named as a beneficiary. This is really important. Doing a lot of planning only to find out the custodian won’t allow it could be a waste.
There are countless other things to consider before deciding if you should name your trust as the beneficiary of your IRA, and you need to talk to a qualified estate planning attorney and your tax advisor before making that decision. A trust is not a one size fits all, and there are different types of trusts to consider (conduit vs. discretionary, etc.). If you aren’t sure if a trust is the right beneficiary for your IRA, call me and I can talk you through all the considerations and help get you to the right people to help make that final decision.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.