Estate planning advantages of naming trust as beneficiary
Since there are no tax advantages to leaving a trust as a beneficiary to an IRA, are there any estate planning advantages like with estate taxes and marital exclusions?
Since there are no tax advantages to leaving a trust as a beneficiary to an IRA, are there any estate planning advantages like with estate taxes and marital exclusions?
Permalink Submitted by Bruce Steiner on Thu, 2012-10-11 22:23
If you leave assets (whether IRAs or other assets) to a child or other beneficiary in trust rather than outright, the assets will be kept out of the beneficiary’s estate, and will be better protected against the beneficiary’s potential creditors (including spouses).
Permalink Submitted by Jack Thomas on Fri, 2012-10-12 12:21
Thanks. What about trying to capture the applicable exemption? Would a person lose this by not naming their trust as beneficiary?
Permalink Submitted by Bruce Steiner on Fri, 2012-10-12 13:13
What do you mean by “their trust”?
You can leave assets to beneficiaries outright or in trust. It has no effect on the estate tax (except if you leave assets to a trust for the spouse that qualifies or doesn’t qualify for the marital deduction, and in the case of a QTIP trust that qualifies for the marital deduction, whether the executors elect or do not elect the marital deduction).
For more on this, see 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 .
Permalink Submitted by Jack Thomas on Fri, 2012-10-12 14:14
I suppose I’m thinking something like a credit shelter trust to try to preserve the marital deduction after the death of the IRA owner. If that’s what a person is trying to accomplish, would it make sense then to name a trust as beneficiary to an IRA? Otherwise they may lose the marital deduction if they don’t have enough assets outside the IRA to fund the trust, is that correct?
Permalink Submitted by Bruce Steiner on Fri, 2012-10-12 14:24
The credit shelter trust is for the estate tax exempt amount, to keep it out of the surviving spouse’s estate. For example, when the exempt amount was $1 million, a married person with assets of $2 million would typically leave the $1 million exempt amount to a credit shelter trust and the excess either to the spouse or to a marital (QTIP) trust that qualified for the marital deduction.
There’s a tradeoff with retirement benefits. In the above example, suppose the person had a $1.5 million IRA and $500,000 of other assets. If he left the IRA to the spouse and the other assets to the credit shelter trust, the spouse could roll it over, name new beneficiaries, possibly convert to a Roth, and get a longer stretchout. However, this would waste some of the estate tax exempt amount, possibly resulting in more estate tax in the spouse’s estate. Alternatively, to use the entire exempt amount, he could leave $500,000 of the IRA (plus the $500,000 of other assets) to the credit shelter trust, and only $1 million of the IRA to the spouse. This might reduce the estate tax in the spouse’s estate (depending on the size of the spouse’s estate and the level of the exempt amount at the spouse’s death), but would be less favorable from an income tax standpoint.
The increase in the exempt amount makes this less of a problem for many people. The exempt amount is scheduled to revert to $1 million next year. The Administration has proposed to make the estate tax exempt amount permanent at $3.5 million. However, no one knows what Congress will do.
There is also portability now. That means that if the first spouse doesn’t use his/her entire exempt amount, the surviving spouse can use it. Portability is scheduled to expire at the end of this year. The Administration has proposed to make it permanent. However, no one knows what Congress will do. Unlike in the United KIngdome, portability in the United States is not indexed for inflation. Also, while there is portability for estate tax, there is no portability for the generation-skipping transfer tax.
For individual advice, you should consult the lawyer who handles your estate planning.