If you have an IRA, you don't have to leave it to a human being. IRS rules allow you to make your estate, or a living trust, the beneficiary of your IRA. If you name a trust, the assets will be distributed according to the rules in the trust declaration. This gives you more control over the inheritance than if an individual takes the account, but it has harsh tax consequences.
If the IRA assets go to your spouse, naming a trust as beneficiary limits his options. When a spouse inherits an IRA, he gets choices nobody else does. Most important of these is that he can choose to treat the account as his own. He can continue to make more contributions to your account, and he doesn't have to start withdrawals until he turns 70 1/2. Most beneficiaries don't have that long before they're required to take distributions. If your spouse inherits through a trust, however, he doesn't get those special options.
Once you turn 70 1/2, you have to start taking required minimum distributions from your IRA every year. Human beneficiaries begin RMDs shortly after they inherit, or they can empty the account over five years. If you die before reaching 70 1/2, your trust can only choose the five-year plan. The trustee must withdraw everything within five years of your death and pay taxes accordingly. Trust taxes are usually higher than what persons pay on the same income.
After 70 1/2
The IRS rules calculate RMDs based on life-expectancy tables. If the tables say you have 15 years to live and your IRA holds $300,000, you withdraw $20,000 this year. Next year, you repeat the calculation. When you die after 70 1/2, your trustee bases the account RMDs on the "life expectancy" that a person your age would have been expected to have. If according to these tables you would have had, say, 12 years to live, the trustee uses that figure this year, then 11 the next year and so on.
If you set up your beneficiary as a "see-through trust," your human beneficiaries get a better deal. A see-through arrangement allows the trust beneficiary to take RMDs based on her age, rather than using your age at death or a five-year plan. You have to meet all the see-through requirements, for example, identifying all the beneficiaries to the IRA administrator. None of the beneficiaries can be another trust or a charity -- they must all be people.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.