Living trust as IRA beneficiary
The July 2008 issue of Ed Slott’s IRA Advisor includes a summary of key points regarding IRA Trust Beneficiary Basics. It states that ‘the trust should be a separate trust, to inherit the IRS and only the IRA; not other non-IRA assets’. Does this mean that the beneficiaries of a living trust that will inherit the IRA as well as other assets won’t qualify as IRA beneficiaries for purposes of the stretch IRA?
Permalink Submitted by Alan Spross on Tue, 2010-01-19 21:17
No, this does not mean that the stretch will be lost, but the recommendation is meant to reduce the risk that it might be lost.
I suspect this advice is based on eliminating the chance of confusion or ambiguities over who the beneficiaries of the IRA assets are to be vrs other assets. For example, if the IRA assets are intended for beneficiaries A and B, but other assets titled to the trust are meant for A, B, C, D and E and it is not totally clear that D is not also intended as an IRA beneficiary, you have a problem and a very big one if D is 25 years older than the oldest of A or B. If a pour over will dumps several personal keepsakes and memorabilia into the trust, you will have even more beneficiaries receiving items of sentimental value etc. who cannot afford to be construed as IRA beneficiaries. You may also have some charitable beneficiaries listed and then the stretch is totally lost if the charity is not paid off by the deadline for determining IRA beneficiaries.
Perhaps Bruce is aware of other reasons for this recommendation.
Permalink Submitted by Bruce Steiner on Wed, 2010-01-20 03:32
FIrst of all, living trusts are overhyped and oversold. While there are reasons for creating living trusts in particular cases, or in some states, they are not necessary or advisable in every case.
There are two reasons for having each beneficiary’s interest in the IRA in a separate trust from his/her interest in the other assets. First, in order to qualify for the stretchout, no one older than the person whose life expectancy is used to measure the stretchout can be a beneficiary or a permissible appointee. To accomplish that, you could either have a separate trust for the IRA benefits, or impose the same restrictions on the other assets. The second reason is to facilitate allocating GST exemption to either the IRA benefits or the other assets.
The separate trusts can be created in the same document or in separate documents.
For more on this, see my article on trusts as beneficiaries of retirement benefits in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf.