Trust Named as Beneficiary — Follow up — Additional Question

Submitted by v Austin on Sun, 2015-06-21 06:29

Clarification of Slott answer below please. Says NEVER move IRA assets into the trust just name trust as benef. Does this mean the IRA is in the name of the trust for all the funds and the Trustee distributes RMD 4 ways to the beneficiaries each year—which is the only money that passes through the trust? And if so, is it then taxed to each individual as ordinary income?

Thanks.

8. Can I name a trust as the beneficiary of my IRA or Roth IRA?
Yes, you can name a trust as the beneficiary of your IRA or Roth IRA. BUT, do not do this unless you understand all of the ramifications of having a trust instead of an individual inheriting the IRA. Always consult with an IRA expert advisor before taking this step. NEVER, NEVER, NEVER move your IRA assets into the trust or retitle your IRA into the name of the trust. Both of those actions are taxable events and you will owe income tax on the entire balance in your IRA and you will no longer have an IRA!! The trust should simply be named as the beneficiary on the beneficiary form.



Submitted by Bruce Steiner on Sun, 2015-06-21 13:25

  • You are correct that, instead of setting up an inherited IRA for the trust and then transferring it to inherited IRAs for the four individuals, the trustee could instead keep the trust open, collect the required distributions (and any additional amounts the trustee wants to take from the IRA), and turn over the amounts collected to the beneficiaries. 
  • However, that wasn’t either of Ed’s points.
  • Ed’s first point is that while an IRA owner can name a trust as a beneficiary of an IRA, an IRA owner can’t actually transfer the IRA itself to the trust during lifetime.  
  • Ed’s second point is that there are some special rules that apply to trusts that are named as beneficiaries of retirement benefits if you want to be able to stretch the distributions over the life expectancy of the oldest beneficiary of the trust.  I discuss these rules in my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal:  http://www.elderlawanswers.com/Documents/Trusts%20as%20Beneficiaries%20of%20Retirement%20Benefits.pdf.  Essentially, Ed is saying “don’t try this at home.”  That doesn’t mean not to do it.  It just means it will be more effort for the lawyer the first few times he/she does it.
  • In order for a trust to be able to stretch distributions over the life expectancy of the oldest beneficiary of the trust, none of the IRA benefits can ever go to anyone older than the person whose life expectany you want to use to measure the stretch, or to anyone other than an individual (e.g., no charities) or another trust subject to the same restrictions.  You have to consider the permissible appointees under a power of appointment, and the remote contingent beneficiaries (i.e., what happens if at some point there is no child, grandchild, etc., who is living).  Alternatively, you can provide that all of the distributions received from the IRA have to be paid out to the beneficiaries on a current basis.  However, that rarely makes any sense since that throws the IRA benefits into the beneficiaries’ estates for estate tax purposes and exposes them to the beneficiaries’ creditors and spouses, thus defeating the purpose of the trust.

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