Trust as IRA beneficiary

Submitted by Jason Hochstadt on Wed, 2016-08-24 17:40

Hello,

1. In the case where a Trust is named as a beneficiary of an IRA (whether conduit or Accumulation), is there any preference (or requirement) between (a) having the Trust referenced in the Last Will or Revocable Living Trust and not prepared until after the demise of the IRA owner (on a testamentary basis), versus (b) such Trust being prepared now, while such individual is alive (on an inter-vivos basis)?

2. Does the answer to the above vary at all depending upon there is just 1 IRA Trust beneficiary versus more than one?

3. Is there specific language that must be incorporated w/in the (a) Beneficiary Designation Form and/or (b) Last Will or Revocable Living Trust regarding the IRA Trust beneficiary (again, whether Conduit or Accumulation)?

4. Is there any way w/ an Accumulation Trust to utilize sub-trusts in order to enable each Trust beneficiary’s RMDs to be taken over his/her life expectancy/IRS tables (per the Single Life Table)- rather than the oldest individual?

5. Finally, for an IRA beneficiary who is a special needs child, must the Trust as IRA beneficiary be prepared any differently/incorporate any special needs language, OR if it’s an accumulation trust, since distributions are at the trustee’s discretion nothing special/unique is required in this regard?

Any feedback would be greatly appreciated in this regard. Thank you!

Jason



Submitted by Bruce Steiner on Sun, 2016-08-28 02:23

  • 1(a)  It doesn’t matter (except for the amount of the legal fees) whether the trust(s) that receive the IRA benefits are in the Will or in a separate trust instrument.  
  • 1(b).  As a practical matter, the IRA owner has to sign his/her Will (or separate trust instrument) while he/she is alive.  If the IRA owner does so after he/she dies, we won’t know about it.
  • 2.  No.  For example, if an IRA owner has more than one child (but no spouse), he/she would typically leave his/her IRA to his/her children in separate trusts for their benefit.
  • 3a.  Yes.  The beneficiary designation would have to say that the IRA is payable to the trust(s).
  • 3b.  Yes.  See my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal:  http://kkwc.com/wp-content/uploads/2015/04/AR20041209132954.pdf.  Conduit trusts rarely if ever make any sense.  They force out all of the distributions from the IRA, thus throwing them into the beneficiaries’ estates, and exposing them to the beneficiaries’ creditors and spouses.
  • 4.  Yes, but in most cases it’s not worth doing so.  Each child will usually be a contingent beneficiary of the other children’s trusts.  In other words, if a child dies without leaving any issue and without exercising his/her power of appointment, the balance of his/her trust will usually go to the trusts for the other children.  However, if the age difference is great, you might exclude the older children as contingent beneficiaries of the younger children’s trusts, especially if the older children have children of their own.
  • 5.  It shouldn’t be necessary if (as is the case if the Will is well-drafted) distributions are discretionary.  However, to avoid any doubt, we generally put in special needs language if we know a child has special needs and receives means-tested government benefits.

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