IRA trust: Control how your retirement funds are distributed to your beneficiaries
Like other types of trust, an individual retirement account (IRA) trust includes a settlor (person who creates the trust) and a trustee (person who manages the assets).
However, as with a charitable trust, the beneficiary who receives the assets is not a person. Instead, the IRA trust names itself as the beneficiary. In other words, after you pass, the trust itself “inherits” all IRA funds. Based on specific instructions written into the trust, the loved ones who will ultimately receive these funds then get paid out of the trust through distributions.
Why would I get an IRA trust, instead of just naming a beneficiary when setting up my retirement account?
Some reasons for setting up an IRA trust
Maximizing the value: Unlike simply naming a direct beneficiary for your IRA, an IRA that’s in a trust can be set up to restrict your loved ones from taking larger distributions – or even taking all funds in one lump sum. Both of which could have significant tax implications. The longer the funds stay in a trust, the more they’ll grow through compound interest.
Asset protection: IRA funds that are inherited by a direct beneficiary are not protected. For example, if a loved one declares bankruptcy, these inherited funds are eligible to pay off debts. However, an IRA that’s payable to a trust can be set up to help protect the funds from creditors.
Successive beneficiaries: If you want an initial portion to go to your spouse, then the rest to go to your children after your spouse passes, an IRA trust may be necessary to set up these distribution rules. This is also true for blended families, where you may have children or other beneficiaries from different marriages.
Minor beneficiaries: By law, minors (under 18) cannot own IRAs. So, if your primary beneficiary is a minor and your IRA funds pass directly to them when you pass, a conservatorship may need to be set up to manage the funds on their behalf until they come of age. An IRA trust can help avoid the need for this conservatorship.
Beneficiaries with special needs: If your beneficiary has special needs, there is an added challenge, given that directly inherited IRA funds are treated as assets – which may cause them to lose any government benefits.
Other key considerations for an IRA trust
Eligibility: You can set up an IRA trust for any type of plan, including a Roth, SEP and SIMPLE IRA.
Cost: An IRA is different than other types of assets that are placed into a trust. This type of trust is more complex and can cost more to set up and maintain.
Types: A conduit trust has a single beneficiary and dictates that all funds must be distributed within a short time period, while an accumulation trust allows the IRA funds to stay in the trust longer.
Distributions: Recent legislation has changed the rules regarding how and when retirement funds are distributed, which can also affect IRA trusts.
Other types of retirement plan trusts
An IRA trust is one of the most common types of retirement plan trusts. But what if you have a 401K or other type of retirement plan? Do the same rules apply? Yes and no. There are similarities in the way all retirement plan trusts are set up and administered. However, given the complexities and variety of ways that different retirement plans can be structured with regards to how and when the funds are taxed, it’s best to work with an experienced estate planning attorney when setting up any type of retirement plan trust.
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Buzz Suuppi
Buzz started The Plan Firm for his family, which is everything to him. Every member of his team is committed to providing effective estate planning and related solutions for families in St. Clair County, Michigan.