TRUSTs as IRA benie. Dangerous language.

Submitted by Peggy Fisher on Sat, 2014-10-25 16:21

I have often heard in workshops to be on the look out for IRA beneficiaries that are trust when the trust is paying estate debts because then the estate becomes the beneficiary and then you loose the stretch, etc. I have often heard that the remedy could be to pay off the debts and expenses before September 30th. And if possible change “shall” to “may”. I think I just found an example of the this. This is how it is stated in the trust….”V. DEATH OF THE GRANTOR, and after the payment of the Grantor’s just debts, funeral expenses, and expenses of last illness, the following distributions shall be made.” Is this it?



Submitted by Bruce Steiner on Sun, 2014-10-26 00:35

  • Why would anyone create a trust to be the beneficiary of IRA benefits and then require or allow the trust to pay the IRA owner’s debts? 
  • Even if it didn’t affect the stretch, it would destroy the exemption from creditors that IRAs enjoy in many if not most states.
  • The estate should pay its own debts and expenses.  If the estate is insufficient, certain other nonprobate assets may be subject to creditors.  However, there’s no reason to subject assets exempt from creditors in many if not most states, such as life insurance and IRA benefits, to creditors.
  • Obviously the trust has to pay its own expenses.
  • For more on trusts as beneficiaries of IRA benefits, 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 .

Submitted by Peggy Fisher on Mon, 2014-10-27 15:11

I think you might have missed the point.  I was looking for confirmation that I had found language in a trust that was drawn up incorrectly. 

Submitted by mk foss on Tue, 2014-10-28 18:02

I agree that the wording of the trust document that you’ve quoted would require that the estate be considered as a beneficiary if any of the estate expenses are paid after September 30 of the year following the grantor/IRA owner’s death.

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