Trust as Beneficiary of an IRA

Submitted by Mel Langer on Fri, 2020-12-25 21:16

Trying to find the answer to this question, as I know it came up before. Don’t know how to find it without thumbing through ten thousand pages, so here goes.

If instead of naming a non spouse as beneficiary of an IRA, the owner instead names a Living Trust as beneficiary, then isn’t there some rule that states the custodian of the IRA must be notified by October of the year following the death of the owner?

And if the custodian is not notified, then what is the penalty/ramification ?

I’m just hard impressed to understand any benefit to naming the Trust as beneficiary. Isn’t it much to do about nothing?

And would you be better off naming the Trust as beneficiary instead of your spouse?

Thank you.



Submitted by Alan - IRA critic on Fri, 2020-12-25 22:54

  • Yes, by 10/31 of the following year, sometimes referred as the “Halloween Rule”. If this is not done, the trust is not qualified for look through, and therefore the custodian must treat is as a non individual beneficiary. The trust RMD requirements in this situation were not changed by the Secure Act. If the IRA owner passed prior to the RBD, the 5 year rule applies. If on or after the RBD, the distribution period is the remaining life expectancy of the decedent. 
  • There are several potential benefits of a trust beneficiary, but trusts are sometimes named as beneficiaries when unnecessary, and in that situation can create complexity and confusion for no benefit.  The main benefits of a trust beneficiary are creditor protection for beneficiaries, and control of distributions. However, control means accumulating the RMDs and other income in the trust subject to higher compressed tax rates.  An often overlooked issue for trust beneficiaries is the naming of an effective trustee to execute the provisions written into the trust. 

Submitted by Mel Langer on Sat, 2020-12-26 02:30

So…it appears to me that it might be better for a non spouse beneficiary to actually NOT NOTIFY the custodian, especially if the deceased had already begun taking RMD’s. That way the beneficiary could use the remaining life expectancy of the decedent, which could and should be a better stretch than the required 10 year payout. I understand the creditor protection benefit but in most, not all states, the beneficiary cannot be their own trustee, if they hope to enjoy this creditor protection. And yes, although not distributed, RMD’s must still be taken, and taxes paid from other monies, since you won’t have the benefit of the RMD against which to withhold tax. Did I go wrong anywhere here? Thanks again. Much appreciated.

Submitted by Alan - IRA critic on Sat, 2020-12-26 03:04

  • Yes, there has been much speculation regarding selective failures to provide trust info to the custodian when the result will be preferable to the 10 year rule. However, the IRS has many regs to issue regarding the Secure Act and trusts in particular, so there are several gray areas regarding the Secure Act. 
  • Many trusts are still conduit trusts or the trustee may have discretion to distribute the RMD and other distributions to the trust beneficiaries, and then these beneficiaries will report the income and pay the taxes on their personal returns. Of course, once distributions come out of the trust, the creditor protection for these funds ends in most cases.

Submitted by Bruce Steiner on Sun, 2020-12-27 03:44

  • A revocable trust is just a substitute for an estate.  Instead of naming it as the beneficiary, it would usually make more sense to name the beneficiaries of the revocable trust as the beneficiaries of the IRA, to avoid running the IRA through the revocable trust.
  • If there’s a spouse, usually the spouse will be the primary beneficiary, though occasionally someone might leave the IRA to the marital (QTIP) trust, the credit shelter trust, or trusts for the children.
  • While revocable trusts make sense in some cases and in some states, they’re overhyped and oversold, and for most people in most states aren’t necessary and tend to be a distraction.  
  • Bruce Steiner

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