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Can I Designate My Family Trust as the Beneficiary of My IRA?


Surprisingly, one of the most common assets to deal with in planning for your estate can be the most challenging--your IRA. Why?

  • First, it passes by contract, according to your beneficiary designation. People sign Wills and create Trusts thinking it takes care of everything, but unless you integrate your IRA into your estate plan, it is not part of your plan and worse, can even be contrary to what you intend.
  • Second, there are complicated tax regulations dealing with IRA's and rules about distributions by inheritors of the IRA. .
  • Third, the IRS can add to the confusion.

A typical solution is to name your spouse as the primary beneficiary (if you're married of course), and name your Trust as contingent beneficiary as your Trust. Financial advisors routinely question this recommendation. Why? Because the IRS' own Publication 590 says that "A trust cannot be a 'designated beneficiary' even if it is a 'named beneficiary'." Wow! Can anyone interpret that for me? (actually, we have interpreted it and it's just plain wrong).

Taxpayers and financial advisors read that sentence and conclude that their Family Trust cannot be a beneficiary of their IRA but they are wrong! The incredible thing is the very next sentence in Publication 590 explains how a trust can be named as "your beneficiary", with some stipulations. The proper type of trust can be named as beneficiary and at your death, if you follow the stipulations, the IRS 'looks through' to the individual beneficiaries and they are deemed to be the inheritors for tax purposes, not the Family Trust. So, the short answer is:

A properly drafted Family Trust can be named as the beneficiary of your IRA!

The next question is often: “Why do I want to name my Trust? Isn't it simpler to just name my spouse and children so it goes directly to them?” Great question! Read on!

  • Are any of your children minors? Or if not a minor, just how good are they with money? Are you ready to hand them several thousand dollars (if not hundreds of thousands) and expect them to use it properly? If so, then why did we just create a trust to hold their assets until they reach age 25 or 30 or even 40 under the terms of your Will or Trust?
  • What happens if one of the named beneficiaries dies? The truth is, we don't know and neither do you unless you read your IRA custodial agreement...and each one is different!
  • Have you looked at your beneficiary designation for that IRA? Many clients are surprised to find that it hasn’t been updated to allow for additional children. If your IRA is directed to your Trust, that change is covered and nothing gets forgotten or missed!
  • Do you have a Special Needs child? They will lose governmental benefits until they use up all of their inherited IRA money.
  • Are you concerned about possibilities of drug or alcohol abuse affecting how your child handles money? Only a trust can handle this issue.
  • Do you have a grandchild or other person you want to benefit? How do you handle this?

A thorough Estate Plan can alleviate worries about each separate asset you have.


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