An individual retirement account (IRA) is an account that allows a person to save for retirement with tax advantages such as tax free growth or tax deferments. An IRA Beneficiary Trust is a specialty designed revocable, living trust that holds the settlor’s IRA accounts after their death for their beneficiaries. Since IRA Beneficiary Trusts are revocable they can be changed at any time up until death by the settlor.
Generally, an IRA Beneficiary Trust prevents a beneficiary from receiving money directly from the IRA after the account holder’s death. The value of a person’s IRA are protected from creditors during his or her lifetime. However, after death, IRA funds lose their protection upon distribution to the IRA’s beneficiaries. IRA Beneficiary Trusts can avoid a beneficiary’s creditor claims by protecting IRA funds while they are in the trust and only distributable upon the discretion of a trustee. This ensures that a beneficiary actually receive the benefit of the IRA.
IRA Beneficiary Trusts can also be setup with spendthrift provisions that can prevent poor investment strategies, excessive spending, immature decisions with the money, or otherwise protect beneficiaries from themselves or their spouses.
Further, IRA Beneficiary Trusts can be especially tailored as a Special Needs Trust that will ensure your beneficiary will continue to receive government assistance.
Can a trust own an IRA?
No. An IRA account holder does not possess the ability to put their IRA in a trust while they are living. However, the IRA account holder can name a trust as the beneficiary of your IRA. This will allow you to dictate how the assets are handled after your death.
Generic trust terms may not be in the best interest of an IRA Beneficiary Trust, so it is best practice to typically create a subtrust for each beneficiary of the IRA to establish terms specifically related to the IRA.
Naming a trust as the beneficiary of your IRA
Deciding who to name as a beneficiary of your IRA Beneficiary Trust can cause complicated tax implications that can affect your loved ones years after your passing. It is best practice to speak with an attorney or qualified tax professional that will assess the individual needs of each client and provide the best advice on a case by case basis.
Types of IRA Beneficiary Trusts
There are two types of IRA Beneficiary Trusts: (1) conduit or (2) accumulation.
A conduit trust is a simpler trust where the trust serves a conduit by distributing the IRA from the trust to the beneficiary thereby taxing the proceeds at the beneficiary’s tax rate. While a conduit trust protects the principal of the IRA, its downside is that is does not provide any protection from creditors on the required distributions from the trust to the beneficiaries.
An accumulation trust, funds are disbursed from the IRA to the trust, whereby a trustee has the discretion as to when to distribute the proceeds and accumulate interest on the principal. While offering more protection from creditors, the downside to an accumulation trust is that it is taxed at the trust’s income tax rate which is typically higher than an individual’s.
Is an IRA Beneficiary Trust the best option for me?
An IRA Beneficiary Trust is not for everyone. Typically, only those with large IRAs or concerns about their beneficiaries should inquire about the use of an IRA Beneficiary Trust. Contact the professionals at The Finity Law Firm to address any concerns that you might have.
Contact us today
Download Your Free Estate Planning Guide
Learn how to protect your family, your assets, and your legacy.