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Can you make your trust a beneficiary of your IRA?
Posted on Aug 31, 2009
When considering your estate planning options as you near retirement age, you may wonder what you can do with your IRA to maximize your tax situation and protect your assets.
A common move in estate planning is for you to name a trust as a beneficiary of your IRA. This is a way for you to avoid taxes and protect your beneficiaries – two important goals in estate planning. This would be an especially useful tactic if you have young children who are not yet able to manage their own money or if you have a special needs child who will need life-long assistance.
A knowledgeable estate planner needs to help you with properly preparing the necessary documentation to make your trust a beneficiary of your IRA. It is important that strict IRS guidelines are followed when the trust is written so you don’t run afoul of the law.
You should also know that some trusts pay higher income tax rates than individuals, so you’ll have to evaluate this possibility when you are trying to decide whether or not this option makes sense for your situation. Care must be taken so our IRA funds don’t get trapped in the trust because of a mistake or oversight in the trust’s preparation.
If you try to transfer funds from your IRA into a trust, the transfer would be likely trigger immediate taxation because such a move would be considered an IRA distribution. Some estate planners suggest a technique to move funds from an IRA to a trust that they say does not cause immediate taxation, but be aware that the IRS may not agree with your estate planner’s assessment. Without a ruling from the IRS – which can be expensive – you should not try to get around being taxed for an IRA distribution.
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