Naming a Trust as Your IRA Beneficiary

Naming a Trust as Your IRA Beneficiary

Do you plan to name your trust as the beneficiary of your IRA? If so, make sure you understand why you are doing it and what the potential consequences are.

IRAs are unique assets and while a trust may be ideal for the majority of your estate, naming a trust as the beneficiary of your IRA is not usually the most tax efficient move.

If the trust is a properly drafted “see-through” trust, IRA RMDs may pass through the trust directly to the individual trust beneficiary. The RMD recipient will be taxed based on his/her individual income tax rate. However, if RMDs are “trapped” in the trust, trust tax rates apply which hits the highest bracket (37%) for trust income over $12,500 in 2018.

Even assuming a trust has been properly drafted, a Multi-Generational IRA (MGIRA) strategy is not available if there are multiple individual beneficiaries. They are all stuck using the oldest trust beneficiary’s life expectancy for purposes of calculating RMDs. The opportunity for the youngest trust beneficiaries to enjoy tax-deferred distributions over their (typically much longer) individual life expectancies is eliminated.

There will always be situations where a trust makes sense. Before naming your trust as the beneficiary of your IRA, be sure that you have all the facts and seek advice from qualified advisors and qualified trust attorneys to help ensure your trust will operate according to your distribution plan.

 

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