Trust as beneficiary

Submitted by dan casey on Wed, 2023-05-17 19:29

It seems it’s hard to get a straght answer on using a trust as a beneficiary of an IRA. Let’s keep it real simple because this is the scenario of 90% of my clients. Assuming they have grown adult kids and they want to protect the money when it goes to the kids from divorce and creditors. Nobody is disabled and assume the trust has the proper language.

Husband and wife, Husband leaves all qualified money to spouse first then trust contingent and vice versa.

What are the pros and cons of this?



Submitted by dan casey on Tue, 2023-05-23 15:43

Just bumping this to the top as its gone unanswered.

Submitted by Howard Stolzer on Fri, 2023-05-26 15:54

I don’t know if this will help but I have had this conversation with some estate attorneys and seem to get similar answers. We usually see the spouse as the recipient of an IRA. The Inherited IRA is then “taken as their own” by the surviving spouse and rolled to a non-inherited IRA. This preserves the 10 yr rule for the children. Trusts are designated as contingent beneficiaries, and as beneficiaries to the surviing spouse’s IRA. The question is what benefit would there be to naming a trust first? I suppose if you had a spendthrift/competence issue that would be a consideration. But otherwise it likely just adds a lot of complexity. 

Submitted by dan casey on Fri, 2023-05-26 16:25

As the spouse has a ton of flexibility.  It’s the trust as a contingent that I’m told causes problems.  Can anyone clarify?

Submitted by Alan - IRA critic on Fri, 2023-05-26 16:31

  • Assuming the surviving spouse assumes ownership of their inherited IRA, transfers it into their existing IRA and DOES NOT make any beneficiary changes, when the surviving spouse passes with deceased spouse named as beneficiary and the trust as contingent, the trust will inherit the remaining IRA balance.
  • Hopefully, the trustee of the trust will be aware of the deadline to submit the trust info to the custodian, does so and the trust is otherwise qualified for look through, the 10 year rule will apply for trust distributions, and if the surviving spouse passed post RBD, there will be annual RMDs required to the trust for years 1-9 based on the age of the oldest countable trust beneficiary, and the inherited IRA will have to be drained in year 10.
  • Since the purpose of the trust is creditor protection, and will also provide spendthrift protection for the funds, the offsetting downside is the higher tax rates of a trust that will have to be paid on the IRA distributions and also on subsequent income in the trust. Therefore, the principal will be preserved except for distributions allowed by the trust provisions including trustee discretion to make distributions, but at the cost of higher marginal rate trust taxes. An annual 1041 will also have to be filed for the trust.

Submitted by dan casey on Sun, 2023-05-28 13:31

So, it would seem that because it becomes an accumulation trust, that would make it not a great idea.  Also, to your point, the trustee has deadlines.  So these comments make me think the kids should be named directly as contingent after the spouse.  I’ve had attorneys set up trusts (that are named as contingent) that set up sub trusts upon the death of the final spouse.  These sub trusts then are used to have distributions ‘pass through’ so as to be protected from divorces and creditors.  This REALLY should not be this complicated.  It’s really a shame.  90% of assets are in qualified accounts and the fact that no one can come up with a consensus of how to handle this is a shame.  And I get everyone’s situation is different but again, 90% of the clients that come in to me all have the same situation.  They just want to pass on thier qualified money to thier kids and not have it exposed to divorces and creditors.

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