Considerations When Making a Trust the IRA Beneficiary

By Tom Ochsenschlager, J.D., CPA

“Regular” or traditional IRAs (as opposed to Roth IRAs) must make annual distributions (withdrawals) to its beneficiaries once they reach the age of 72. The amount of the required annual distribution is based on the IRS Required Minimum Distribution Worksheet. In effect, the worksheet specifies a percentage of the remaining IRA asset value that must be distributed each year. The required percentage is never 100% even if the beneficiary lives to be 115 years old. Of course, the IRA can make greater distributions than the minimum amount required by the worksheet (required minimum distribution or RMD), but in many situations there will be a balance in the IRA account when the individual who owned the account passes away.

Typically, the deceased owner of the IRA will have completed documentation that specifies the beneficiaries of the remaining IRA balance. However, there are circumstances where the IRA owner should consider naming a trust as the IRA beneficiary rather than individuals, such as:

• Where the beneficiary is a minor who cannot legally own an interest in an IRA.
• Where the beneficiary receives government disability benefits and might lose the government support if they receive ownership of assets in excess of the limitations on the benefit.
• Where the IRA owner has remarried, they might name the latest spouse as the primary recipient of the IRA benefits but have children from the first marriage receive the remainder of the IRA upon the passing of the second spouse.
• A beneficiary receiving an interest in an IRA would have the opportunity to draw down from the IRA as much as they want in excess of the RMD. Where the IRA owner is concerned that one or more of the IRA beneficiaries might be financially irresponsible, having a trust own the IRA could limit the beneficiary’s capability of making such a choice as the trustee of the trust would be in control of all distributions.
• The owner of an IRA can designate whomever they want to receive the remainder interest in their IRA. If the initial owner of the IRA wants to have some control over who is to receive this remainder interest, that control can be accomplished by the initial owner giving specific instructions to the trustees of the trust.
• The assets of an inherited IRA may be subject to claims from creditors (see Supreme Court ruling in Clark v. Rameker). Retaining the IRA assets in a “spend thrift trust” will not constitute an asset of the beneficiary and should protect the IRA from creditors’ claims against the IRA assets.

It should be noted that the SECURE Act generally requires that the IRA be distributed within a certain number of years after the IRA owner’s death except where the recipient of the distribution is a surviving spouse, the deceased owner’s minor children, a beneficiary who is disabled or chronically ill, or any beneficiary who is not more than 10 years younger than the original IRA owner.

The SECURE Act generally requires the IRA to, in effect, liquidate and distribute its assets to the trust within 10 years of the death of the IRA owner. While the trust will be subject to whatever the appropriate tax will be on the distributed amount, it can utilize its discretion and the terms of its trust agreement as to when to make these distributions to the trust beneficiaries. Qualifying trusts (see-through trusts) can be designed to distribute IRA funds to trust beneficiaries immediately or gradually over time.

If you plan to name a trust as the beneficiary of an IRA, it is important to work with a knowledgeable estate planning attorney to ensure the language in the trust document gives the trust the ability to use the new SECURE Act IRA distribution provisions.