By Beverly DeVeny, IRA Technical Expert Follow Me on Twitter: @BevIRAEdSlott
The number one problem I see when a trust is named as an IRA beneficiary is that at some point, either during the account owner’s lifetime or when the trust inherits the IRA, the IRA gets transferred into the trust. An IRA is an Individual Retirement Arrangement and it must be owned by an individual. The transfer into the trust is a taxable event and cannot be undone – but it can be avoided.
If the trust is a qualifying trust – and that is a subject for another day – then at the death of the IRA owner, required distributions can be made from the IRA to the trust. The IRA is retitled as an inherited IRA for the benefit of the trust and it remains outside of the trust. Only distributions requested by the trustee go into the trust. For required distributions, the age of the oldest trust beneficiary is used and the IRA can be stretched over that life expectancy.
An IRA cannot be transferred or assigned to another individual or to an entity except upon the death of the IRA owner or a beneficiary who had inherited the IRA. (It can also be transferred to an ex-spouse of the IRA owner as part of a divorce decree or separation agreement.) Any transfer during lifetime is a taxable event and it means the end of the IRA.
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