Transferring an IRA to beneficiaries after a person's death can sometimes be a complicated process, especially if minors are involved or a complex family structure. A trust as an IRA beneficiary can bring you one step closer to achieving estate planning goals. You can ensure that most of your IRA assets are preserved until your heirs are older, perhaps until your retirement. However, its configuration costs more and has other pitfalls.
Consider the difficulties and alternatives before making your choice. It's not uncommon for owners of an Individual Retirement Account (IRA) to designate a trust as their beneficiary. By using a trust, the owner of an IRA retains some degree of control over how assets are distributed after their death. However, while a trust is an effective estate planning tool, IRA owners must take steps to ensure that the desired outcome is consistent with their needs.
It's not a good idea to name a trust as the beneficiary of your IRA because the IRA will lose the benefit of tax-deferred growth. This is because the IRA will have to be distributed more quickly and then taxed in a different way compared to other situations. The same applies if a business entity or asset is a beneficiary. Contact an experienced and trusted estate planning law firm for additional information.
Surviving spouses also receive special treatment in which they are allowed to step into the owner's shoes and withdraw the balance of the IRA during their life expectancy, or they can convert the inherited IRA into their own IRA. It only takes effect if all parties involved, especially the owner of the IRA, the custodian of the IRA, the trustee of the trust and any attorney representing the beneficiary, agree to the interpretation of the provisions of the trust and applicable laws. A Fiduciary IRA may provide additional protection for wealth, but it costs more and has less flexibility. However, the tax cost may pale in comparison to the IRA owner's desire to direct and control who and how IRA assets are ultimately disbursed.
But this was only possible because she was the sole beneficiary of the trust and was the surviving wife of the IRA owner. Another option is to empty your IRA early, pay all taxes, and then leave the money in a regular trust. The owner of an IRA may want to ensure that both their current spouse receives income from the assets and the children of any previous marriage receive their share of the assets. The person who wishes to name a trust as a beneficiary must confirm why they want the trust to be the beneficiary and ensure that the conditions of the trust can be met.
Otherwise, the RMD rules will invalidate what the IRA owner was trying to achieve. She negotiated with the IRS to allow her to transfer her husband's tax-free IRA to an IRA in his name, and the IRS allowed her to do so. They could even be lower than the annual income and earnings of the IRA, allowing the IRA to increase for years despite distributions. Since the length of time allowed to withdraw funds from an inherited IRA varies depending on the age at which the owner of an IRA dies, the best tax strategy for an inherited IRA may change over time.
Most IRA account owners appoint a beneficiary or beneficiaries to receive the assets after the death of the IRA owner. The RMDs of a beneficiary of a trust IRA will be calculated based on the partial payment rule (if the named beneficiaries are eligible designated beneficiaries), the 10-year rule, or the 5-year rule, depending on the wording of the trust and who the beneficiaries of the trust are. . .