Appropriateness of naming Trust as IRA beneficiary

Submitted by Janice Milano on Thu, 2011-06-23 18:15

What are the advantages and pitfalls of naming a revocable trust as the beneficiary of an IRA, annuity, or a ROTH IRA?

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Permalink Submitted by Bruce Steiner on Fri, 2011-06-24 03:24

The 2 possible disadvantages are:

1. It necessitates creating a revocable trust. While revocable trusts are useful in some cases, they are overhyped and oversold, and not necessary in most cases.

2. Even if a revocable trust is appropriate in a particular situation, there are several ways in which naming the revocable trust as beneficiary could destroy the stretchout.

I can’t think of any advantages.

Permalink Submitted by mk foss on Fri, 2011-06-24 04:58

The advantages of naming a trust as an IRA beneficiary contemplate that the trust when it becomes irrevocable will be used for a specified purpose.

If you want to insure that the beneficiary takes RMDs over their lifetime instead of depleting the IRA all at once, you need a trust.

If there are minor beneficiaries who could receive the entire IRA at age 18, you need a trust.

If there is a taxable estate and the executor does not have access to funds to pay the estate tax attributable to the value of the IRA, you need an irrevocable trust.

If there is a creditor problem for a beneficiary, you may need a trust. There is a lot of current litigation regarding individuals filing for bankruptcy who may not be able to protect an inherited IRA.

Permalink Submitted by Bruce Steiner on Fri, 2011-06-24 13:30

Despite the heading, the original question had nothing to do with whether to name a trust as beneficiary. The reasons for leaving IRA benefits in trust rather than outright are the same as the reasons for leaving other assets in trust rather than outright. I explain this in 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.

The original question involved naming a revocable trust as the beneficiary. I responded by pointing out the major possible disadvantages of this. I can’t think of any advantages of doing this.