A trust as the beneficiary of your individual retirement account will be acceptable to the IRA custodian as a valid beneficiary setup. However, before you make the move to change your beneficiary, evaluate whether the trust will accomplish your goals for the IRA money and also how the trust should be structured in the event of your death.
Beneficiary Trust Requirements
To obtain the maximum benefit -- which is to minimize the tax bite -- your trust must be properly structured to function as the beneficiary for your IRA. The trust must be written to comply with the tax rule guidelines so that the trust functions as a conduit for required IRA distributions to reach live beneficiaries. Properly paying out distributions is referred to as a "see through" provision. The trust must take withdrawals from your IRA after you pass away and pass the money on to the final beneficiaries. You also need to provide a copy of your trust documents to the custodian of your IRA.
Reasons for Trust as Beneficiary
Naming a trust as the beneficiary of your IRA puts the control of the account and how withdrawals are distributed from the retirement account in the hands of the trustee. You may want to follow this course if the trust beneficiaries are minors or there are other reasons you do not want these individuals to have direct access to the IRA balance after you die. Typically, the trustee will elect to use the so-called stretch withdrawal option, which is a strategy to take the minimum amount out of the IRA each year and leave as much value as possible to continue to grow tax-deferred.
Minimum Withdrawal Restrictions
If a regular person is the beneficiary of an IRA, the stretch IRA withdrawal option allows that person to take a distribution each year based on her life expectancy at the time of the owner's death. This choice results in the smallest legal withdrawals, leaving the bulk of the IRA to continue to grow. If you had several named beneficiaries for your IRA, each could set up withdrawals based on his own life expectancy. As a result, younger beneficiaries have smaller required distribution amounts. With a trust as beneficiary, the minimum withdrawals for the stretch option are based on the age of the oldest beneficiary of the trust. If the ages of the beneficiaries cover a wide spread, the trust will drawn down the IRA faster than the individual beneficiaries as a group.
Keep Documents Updated
With a trust listed as your IRA beneficiary, you need to keep your trust document up-to-date concerning retirement plan beneficiary rules. If the trust is not properly structured, either the entire account balance could become taxable income to the trust upon your death or the trustee would be limited to the 5-year window to withdraw and distribute the full value of the account. Communicate with both the trustee and the custodian of your IRA concerning your wishes about the disposition of your IRA after your death.
Video of the Day
- Stockbyte/Stockbyte/Getty Images