Good Reasons to Name a Trust as IRA Beneficiary
When a trust is named as beneficiary of an IRA, several possible negative issues may be introduced. For example, after the death of the IRA owner, things can become more complex for the beneficiaries. Trust beneficiaries cannot simply set up their own inherited IRAs. We must open a trust-held inherited IRA and, depending on the trust document, the trust beneficiaries could be limited in their access to the dollars. Also, recognize that there is no income tax benefit that can be gained with a trust that cannot be gained without a trust. In fact, naming a trust as IRA beneficiary creates the real possibility that taxes paid on the assets could be significantly higher vs. if an actual person was named as IRA beneficiary. Trust tax rates hit the 37% bracket when income exceeds $15,650. By comparison, a married couple filing jointly would not reach the 37% bracket in 2025 until taxable income exceeded $751,600. (Single filers reach the top tax rate of 37% in 2025 when taxable income exceeds $626,350.)
Based on these potential negative factors, a trust should not be named as beneficiary of an IRA unless there is a legitimate reason to do so. And there are valid reasons to name trust as IRA beneficiary. Good reasons to name a trust as IRA beneficiary include:
Minor as Beneficiary
Minors cannot make elections like IRA distribution decisions. If a minor were named directly as IRA beneficiary, the court could require a guardian be appointed for the minor to act on their behalf. To avoid this, a trust as beneficiary could be a better option.
Management
A trust could be advisable if an IRA beneficiary is someone who may need help with managing the IRA funds and taking required distributions, even if the beneficiary is an adult. A trust could help provide for someone who is not physically or mentally able to care for themselves or to handle money. A trust could also protect a vulnerable or unsophisticated beneficiary from unscrupulous people who might take advantage of him.
Creditor Protection
A trust could be used to protect the beneficiary from creditor problems, as many states may not provide creditor protection for IRA beneficiaries.
Control
Some people simply want to control their money after they die. We refer to this as “ruling from the grave.” A trust can accomplish this. However, if the only purpose of the trust is for the deceased person to exercise control over an otherwise healthy, mature, responsible, adult beneficiary, it is probably not a healthy plan for family relations.
Second Marriages
A person may want to leave Spouse #2 the annual IRA income, but after Spouse #2 passes away, the original IRA owner might want the assets to go to the children from his first marriage. Whatever the post-death planning needs are for the IRA owner in second-marriage situations, naming a trust as IRA beneficiary could be the only way to make it happen.
This is not the be-all, end-all list of why naming a trust as IRA beneficiary could make sense. While we will continue to dissuade people from naming trusts as their IRA beneficiary unless there is a legitimate reason to do so, it is important to recognize that valid reasons do exist.
By Andy Ives, CFP®, AIF®
IRA Analyst
Ed Slott and Company, LLC
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.