generation-skipping planning reasons for the use of an IRA trust

Submitted by Peggy Fisher on Wed, 2014-03-12 14:28

I have seen this listed many times as a reason for having a trust as a beneficiary for an IRA. But I do not know what it means. Could you please explain?



Submitted by mk foss on Thu, 2014-03-13 01:05

There are a couple of things that this could mean;

  1. If the IRA owner wants to skip a generation and have the IRA  payable to grandchlildren to get the longest payout stretch, there is a concern that the grandchildren will withdraw the IRA benefits long before the life prescribed in IRS tables. With the trust, you can prevent premature termination of the IRA.
  2. The IRA owner’s children may be wealthy enough and leaving the IRA benefits to them could increase their taxable estates and their income tax brackets.
  3. If the IRA owner wants to insure that grandchildren will have funds for college, a first-time home purchase or some other desirable benefit – the trust will allow the accumulation of funds for those purposes. There are special rules in naming beneficiaries if the trust intends to accumulate income and there are compressed tax brackets – so this reason needs extra careful planning.


Submitted by Bruce Steiner on Thu, 2014-03-13 01:48

Our clients generally provide for their children in trust rather than outright.  In this way, the children’s inheritances are not included in their estates for estate tax purposes, and are better protected against their creditors and spouses. The same reasons for leaving other assets in trust rather than outright apply in the case of IRA benefits.  However, when a trust is the beneficiary of retirement benefits, the stretch is limited to the life expectany of the oldest beneficiary of the trust.  You have to be careful to make sure that none of the IRA benefits payable to the trust can ever be distributed or appointed to anyone older than the person whose life expectancy you want to use to measure the stretch, or to anyone other than an individual or another trust subject to the same restrictions. For more on this, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal:  http://www.kkwc.com/docs/AR20041209132954.pdf .   (If the link doesn’t work, paste it in your browser.)



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