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Naming a beneficiary of your IRA is perhaps the most important consideration when setting up your IRA account. Though your IRA is designed primarily to provide you with retirement income – it can also present estate planning and long-term financial benefits for your designated beneficiaries. When selecting a beneficiary for your IRA, you have a plethora of options: naming your spouse, children, grandchildren, other relatives, friends, trusts and even charities. While in most cases naming your spouse as beneficiary makes the most sense, other arrangements may do a better job of accomplishing your goals.

For estate planning purposes, it is highly desirable to make sure that one’s IRA is not consumed by estate and income taxes upon the death of the IRA owner. Further, it is usually most desirable to create a so-called “stretch IRA”, where your named beneficiaries draw down your IRA over their lifetime and only pay taxes upon withdrawal.  While attorneys are becoming better skilled at the nuances of IRA estate planning, there are very specific guidelines that need to be followed if you choose to name a trust as beneficiary.  Violating these guidelines may invalidate the potential benefits of the stretch IRA and subject the IRA to estate and income taxes at once upon death.   

According to the IRS, in order to name a trust as IRA beneficiary and have the trust beneficiaries treated as IRA designated beneficiaries, the trust must meet the following requirements:

  1. The trust must be valid under state law
  2. The trust must be irrevocable or become irrevocable upon the IRA owner’s death
  3. The beneficiaries must be individuals, not organizations, charities, etc.
  4. The individual beneficiaries must be identifiable from the trust document, therefore qualifying the trust as a “see-through trust” in which the age of the oldest beneficiary is used for purposes of determining the annual required minimum distribution
  5. A copy of the trust documents must be provided to the custodian or trustee of your IRA

Trusts offer other advantages in certain cases where naming an individual might not apply, such as in the following: 

  1. Protection for a spendthrift beneficiary.
  2. Protection for minor or special needs trust beneficiaries.
  3. The funding of a bypass trust, ensuring the IRA owner can make optimum use of their unified credit estate tax exemption amount.
  4. Providing for children from a previous marriage.
  5. Protection from creditors.

While designating a trust as the beneficiary of an IRA can be an effective estate planning tool, it is imperative that all parties involved – the IRA owner, IRA custodian, trustees of the trust and any legal counsel representing the owners and beneficiaries  work together to make certain that the trust provisions are consistent with proper IRA estate planning and applicable laws.  

Seeking the assistance of an estate planning attorney and tax professional are highly recommended for determining if naming a trust as beneficiary is the correct route and what type of trust is needed to meet your needs. Should this be an issue that you’d like to explore more closely, please contact us as we’d be happy to provide referrals to the highly competent and trained professionals we work closely with at Robert Osher Investment Management.  

Please note that no matter what your designation, it is important to ensure that an up-to-date beneficiary designation is on file with your IRA custodian at all times. Take the time to review your beneficiary selections periodically to ensure that those choices are in line with your wishes, overall estate plan and current tax and estate planning laws.