When You SHOULD Name a Trust as IRA Beneficiary
Often, there seems to be no purpose for naming the trust and it brings unnecessary complications. Trusts won’t help with income taxes. In fact, they can increase the tax hit because IRA funds may be subject to high trust tax rates.
Naming a trust is not something that should be done without a clear purpose. Here are six good reasons to name a trust as an IRA beneficiary:
- Minor Beneficiaries. When there are minor children involved, naming a trust can be a good plan. Having a minor be named directly on a beneficiary form is a recipe for disaster because a minor cannot legally conduct business on the account. It may be possible in some cases to name a Uniform Trust for Minors (UTMA) or Uniform Gift to Minors (UGMA) account as an IRA beneficiary, but not all custodians allow this. Also, these accounts don’t offer the ability to control funds after the minor reaches the age of majority the way a trust can. Especially with larger IRAs, when minors are involved, naming a trust as the beneficiary may be necessary.
- Special Need Beneficiaries. For special needs beneficiaries, a trust is essential to manage money and to protect government benefits when IRA funds are inherited. A special needs trust drafted to comply with the SECURE and SECURE 2.0 rules can still use the stretch instead of the 10-year rule, allowing payments to be paid out over the life expectancy of the special needs beneficiary.
- Substance Abuse Issues. No IRA owner would want to see their life’s savings support a beneficiary’s drug problem or gambling addiction. By naming a trust as beneficiary, instead of naming a beneficiary with substance abuse issues directly on the account, controls can be put in place to ensure this does not happen.
- Vulnerable Beneficiaries. There is no shortage of con artists and scammers looking to take advantage of vulnerable or naïve beneficiaries with large inheritances. To protect these individuals, naming a trust as the IRA beneficiary can be extremely useful for limiting access and warding off those with malicious intent.
- Divorce Concerns. While most people love their children and grandchildren, they may not feel as warmly towards the people their offspring marry. There may be concerns about money ending up in the wrong hand if marriages go south and there is divorce. A trust named as an IRA beneficiary can alleviate these concerns.
- Creditor Protection. Inherited IRAs are not protected under federal law either in bankruptcy or from other creditors. There is some protection under state laws, but this can vary. A trust can help shield IRA funds from the beneficiary’s creditors.
By Sarah Brenner, JD
Director of Retirement Education
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.