When you hold an IRA, those funds can be distributed to the person you name as the beneficiary or to an inheritance trust. Some IRA owners choose a trust because it gives them a degree of control over how the assets are distributed after they die.
Before you name a trust as the beneficiary of your IRA, however, consider the pros and cons. Attorney Christopher Slusser and the staff of the Slusser Law Firm in Hazleton and Philadelphia can help you handle your estate planning needs.
Designating a trust as beneficiary can be useful if the intended beneficiary has financial issues and is not a good money manager. That could mean distributing assets according to a certain schedule or simply withholding access until the beneficiary is a certain age. The trust can also provide protection from creditors if your heir is likely to owe money in a divorce or file bankruptcy.
A trust can also be used to provide for children from a previous marriage, as long as it meets certain requirements. It could, for example, allow someone to leave enough money to care for their spouse, with remaining funds going to their children after their spouse passes.
That said, designating a trust as the beneficiary of an IRA can be tricky. You’ll need specialized guidance to avoid costly tax mistakes and other unintended consequences. Generally, when someone inherits an IRA, they must withdraw a minimum amount each year. Heirs have the option of stretching payments out over their expected lifespan, which means funds can continue to grow with tax-free benefits.
When the beneficiary is a trust, the IRS will “look through” the trust and treat the heir(s) as if they were the named beneficiary. That way the trust can take advantage of the same minimum-distribution strategies.
However, several factors can disqualify the trust from this look-through treatment. Trusts in which the oldest beneficiary cannot be clearly identified, or which name a nonperson beneficiary (such as a charity or estate) won’t qualify for look-through treatment. If that happens, payments may be calculated according to the original owner’s life expectancy, as if they were still alive. That could mean a far more rapid payout than desirable.
On the other hand, if you leave your IRA outright to your spouse, he or she has the option to roll those funds into his or her own IRA and defer distributions until age 70 1/2. Then, when your surviving spouse dies, the IRA can be left to younger heirs, using their life expectancy to set distributions. With the rollover option, couples can extend the tax benefits of an IRA account for decades, even generations.
An IRA trust can be useful in the right circumstances. Consult an experienced estate planning professional for assistance in crafting your strategy and designing a trust.
If you need help with estate planning, contact the Slusser Law Firm. The team at the Slusser Law Firm has helped many clients throughout Luzerne, Lackawanna, Carbon, Columbia and Schuylkill counties and the Greater Philadelphia area.