However, putting an IRA in a trust has its drawbacks. The main of these are the potential tax consequences. Trust distributions are taxed at trust rates, which in most cases are much higher than individual tax rates. Another drawback is the complex treatment of distributions.
Why would the owner of an IRA leave retirement assets to a trust and not directly to a beneficiary? The owner of the IRA may be concerned that the beneficiary, by inheriting the IRA, will immediately exhaust the assets or will not set aside funds to cover the taxes due. For this reason, many people find the idea of leaving IRA assets to a trust attractive, and not to individual beneficiaries, since they can include language in the trust that indicates when and how the assets can be distributed to the beneficiaries of the trust. The trust can also provide additional benefits, such as asset protection from creditors and centralized asset management. While trusts can streamline most areas of estate planning, they can create more paperwork and even additional tax burdens for beneficiaries of an inherited IRA.
It's common for the owner of an IRA to not use all of his funds and leaves the rest of the account to his heirs. The general IRA distribution rules in effect by the participant's Internal Revenue Service (“IRS”) require that owners of an IRA (also known as participants) begin withdrawing funds from their IRA when they turn 72 (known as mandatory start date or RBD). An IRA can be provided by the employer or self-employed, and it can provide certain tax benefits to the policyholder. Another option is to convert a traditional IRA into a Roth IRA and avoid taxing distributions to the trust and beneficiaries.
. EDBs include surviving spouses, minor children of the original owner of the IRA (up to the age of majority), people with disabilities or chronic illnesses, and beneficiaries who are no more than 10 years younger than the original owner of the IRA. For example, if the assets inherited from the IRA are left in the hands of an accumulation trust and the three children are named beneficiaries of the trust, the trustee can reinvest these assets in the trust and determine when and how to pay the assets to the designated beneficiaries based on the terms of the trust itself. As such, one of the most common disputes associated with IRA heir trusts occurs when the trustee fails to manage the trust in an efficient and legal manner.
You should consult an attorney who specializes in trusts if you want to create an IRA heirs trust or if you have problems related to an IRA heirs trust. The trustee and custodian of the IRA are also a key member of the planning team, since they will be responsible for the actual implementation of distributions to the trust. If you set up a trust as part of your estate plan and want to include your IRA assets, it's important to consider the characteristics of an IRA and the tax consequences associated with certain transactions. However, with careful planning and consideration of appropriate beneficiary designations, IRAs can be effectively protected for the next generation.
The important factors to consider are how the beneficiaries take possession of the IRA assets and over what period of time. However, you can name a trust as the beneficiary of your IRA and dictate how the assets will be managed after your death. .