Clarification on Setting Trusts as Beneficiaries
Reading the InvestmentNews article titled “Should you name a trust as a IRA beneficiary?” From the article:
“Individual retirement account assets can’t be put into trusts directly during a client’s lifetime without destroying the IRA’s tax shelter. Rather, a trust must be named as the beneficiary of the client’s IRA. The trust would inherit the IRA upon the client’s death, and beneficiaries of that trust would have access to the funds.
Asset protection is the primary reason to do this. Trusts shield IRA assets in the event of lawsuits, business failures, divorce and creditors, for example. While taxpayers enjoy state and federal protections for IRA assets during their life, heirs who inherit an IRA directly — not through a trust — lose those protections.”
Is this just a poorly written article? My understanding is that you only want to put distributions in the trust, not the actual accounts. Doing so would be a taxable event because it would be income to the trust.
Permalink Submitted by Alan - IRA critic on Thu, 2019-03-07 18:27
The article is basically correct. When a trust inherits an IRA, it is the beneficial owner and the IRA is titled “Trust ABC as beneficiary of Jason Smith”. If the trust qualifies for look through treatment, the RMDs are based on the life expectancy of the oldest trust beneficiary. All distributions from the IRA are paid to the trust and reported on a 1099R showing the trust’s EIN. The trust provisions determine if the IRA distributions are accumulated in the trust with taxes paid at the higher trust rates, or passed through to the trust beneficiaries and taxed at their individual rates. Also, some states have passed statutes providing creditor protection for state residents to replace the creditor protection lost at the federal level.
Permalink Submitted by Kyle Eaton on Thu, 2019-03-07 22:02
Thanks. That is what I was missing. They didn’t really discus titling, just that an inherited IRA would be required.
Permalink Submitted by Robert Harrison on Sat, 2019-03-09 17:09
Most of my retirement assets are in a regular IRA. One of my sons is disabled and in named as a IRA beneficiary via a Special Needs Trust. I am in RMD mode and he is in his 40’s. When I pass, is he (his Special Needs Trust) required to continue RMD’s per my age? I have the impression that all distributions from the IRA would be taxable at IRS Trust rates which are pretty high. Any guidance on how to leave a Special Needs Trust that isn’t highly taxed? Thanks for any suggestions!
Permalink Submitted by Bruce Steiner on Sun, 2019-03-10 03:11
You could convert to a Roth during your lifetime.