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A Better Partnership


Nov 2011
November 01, 2011

Estate Planning Tip: Trusts As Beneficiaries

Naming a Trust as IRA Beneficiary

Clients often tell me that their financial advisor has told them not to designate their trust as the beneficiary of their IRA and other retirement accounts because of adverse tax consequences.  This advice is often incorrect.

A trust can be a beneficiary of an IRA without any adverse tax consequences if the trust and the beneficiary designation are properly drafted.  That’s because the IRS has rules that allow taxpayers to “see through” a trust if the trust meets certain requirements.  This allows the IRA to be distributed and taxed just as if an individual was named as the beneficiary.

The requirements are:
  1. The trust must be valid under state law
  2. The trust is or becomes irrevocable upon the death of the IRA account owner
  3. The beneficiaries of the trust are identifiable from the trust instrument
  4. The trust documents are provided to the IRA administrator
  5. All of the trust beneficiaries must be individuals.  For the typical client, these requirements are easily met.

Meeting these requirements will allow the IRA to be distributed over the life expectancy of the oldest trust beneficiary.  In my experience, this will be more than enough of a “stretch” and the individual beneficiaries of the IRA will end up taking their share of the IRA over a much shorter period of time than they could have.  Therefore, in many cases it is good enough to use a simple IRA beneficiary designation that simply identifies the trust.

However, if a maximum stretch is desired so that each individual beneficiary can use his or her own individual life expectancy over which to stretch IRA distributions, this can be easily accomplished with a customized IRA beneficiary designation that designates each individual beneficiary’s subtrust as the beneficiary.

Trust Benefits for the Client

Financial advisors, in a team effort with the client’s estate planning attorney, should not hesitate to allow clients to name trusts as beneficiaries of their IRA accounts.

A carefully drafted trust can provide a client with many benefits, such as incorporating the IRA assets into a rational, well thought out plan to distribute all of the client’s assets after death, asset protection planning for the IRA beneficiaries, asset management assistance for the IRA beneficiaries and estate tax planning.  In some cases, these benefits can be just as important, or even more important, than the income tax deferral provided by IRA ownership of assets.

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