One of the primary reasons for creating a trust – either revocable or irrevocable – is to avoid having the assets you fund it with go through probate when you die. Assets with designated beneficiaries, such as an IRA, don't pass through probate either. If probate is your primary reason for creating a trust, naming your trust as beneficiary of your IRA achieves the same thing twice. If you have other reasons for designing a trust, however, making an IRA payable to your trust might meet your goals. There are some tax considerations, however.
When you contribute to a traditional IRA, the Internal Revenue Service doesn't tax you on this money. Taxation occurs at the other end of the process, when you or your beneficiaries take distributions. Therefore, if you name your trust as beneficiary, it receives the IRA at your death, less the tax liability that the distribution generates. Tax law allows you to bypass this problem to some extent by drafting your trust with a "see-through" clause, so the money and the tax liability trickle down to your trust beneficiaries. Your trust beneficiaries do not have to take your IRA proceeds all at once. The trustee of your trust can take required minimum distributions and pay this money out to your beneficiaries yearly so they won't be hit with a big tax bill, as they would if they took a lump sum.
Distributions to Beneficiaries
If you've named multiple beneficiaries in your trust and they're all sharing in your IRA proceeds, distributions are based on the life expectancy of the oldest if your trustee elects to stretch out payments, rather than give each beneficiary a lump sum. This can shortchange the youngest beneficiary because it prevents him from stretching out the payments for the best possible tax advantage. Your trustee can also take the distributions and pass them to your beneficiaries over the same time period as you would have if you hadn't died, or she take them over five years. She can elect whichever option is most beneficial to your estate and to your beneficiaries.
Roth IRAs are an exception to some of the usual tax and inheritance rules. Assuming you opened your Roth five or more years before your death, payments of the proceeds from the IRA to your trust are tax-free – you already paid taxes on your contributions in the year you earned the income. Roth distributions to your beneficiaries are still subject to annual minimums, and – just like traditional IRAs –they're based on the age of your oldest beneficiary.
Naming Your Spouse Instead
If you're married, you might consider naming your spouse as beneficiary of your IRA, leaving it out of your trust and sparing her a lot of tax issues. The IRS has special rules for spouses. When she inherits your IRA, she can treat it as her own, taking distributions when she would normally be required to. This can have some significant tax advantages, and you can avoid the complicated disbursement rules for other beneficiaries.