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.