When a trust is named as the beneficiary of an IRA, the trust inherits the IRA when the owner of the IRA dies. The IRA is then maintained as a separate account that is an asset of the trust. 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 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. 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. We'll discuss later on whether it's the trust or the beneficiaries who will pay taxes on the income of the IRA.
For most beneficiaries, the SECURE Act now requires that IRA assets be distributed within ten years of the year the IRA owner died. If the original owner of the IRA had not yet initiated the required minimum distributions, the full IRA must be distributed within five years. The trustee, of course, can withdraw more than the required distribution from the IRA any time he wants. A non-working spouse can also own an IRA, but must receive contributions from the working spouse and the income of the working spouse must meet the criteria.
A Fiduciary IRA may provide additional protection for wealth, but it costs more and has less flexibility. If transferred to a trust, IRA assets become taxable, since the IRS considers this transfer to be a distribution. However, as with the transfer of other assets to heirs, owners of an IRA may be concerned about how the final heirs will manage a potential lump sum of taxable money that is distributed directly to the heir or heirs in the event of the death of the owner of the IRA. 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.
IRAs were created in 1974 under the Employee Retirement Income Security Act, or ERISA, to help workers save for retirement on their own. Minimum distributions will continue to be required from the Roth IRA once it is inherited, but Roth distributions will not constitute taxable income. The only condition was that I had to renew the inherited IRA within 60 days of distribution. That's why, in most cases, it's best for the trustee to take the minimum required IRA distribution each year and distribute it to the beneficiary.
Second, for those who were covered, IRAs provided a place for retirement plan assets to continue to grow when the account holder changed jobs through an IRA renewal.