As the name implies, an IRA trust is an estate planning option for individuals who have saved money through a company sponsored retirement plan. For lots of people, retirement plan assets are among the most valuable gifts that can be passed on to loved ones, making it important to carefully arrange for their ultimate transfer. Read on to see how an IRA inheritance trust might help.
Understanding When An IRA Trust Makes Sense
In many families, the funds in a retirement plan are second only to a home in terms of assets available to pass on to loved ones. Given this significance, attorneys at Phelps LaClair Law point out that it’s well worth giving IRA accounts special attention during estate planning. Although an IRA cannot actually be placed in a trust, the beneficiary of an IRA account can be a trust, and Phelps LaClair offers this advice on when naming the trust as beneficiary can be a wise choice:
If you want to make sure the remainder of your IRA can be used to provide for certain types of beneficiaries, you might need an IRA Trust. In cases where the intended beneficiaries are minors, have special needs, or require someone else to manage their money for them, an IRA trust is a good idea. You will be able to leave specific instructions regarding the distribution and management of your IRA funds…. The trust allows you to decide when and how your beneficiaries receive the funds, providing protection for young beneficiaries or those with financial difficulties. If your beneficiary is not financially savvy, you can hire a professional trustee who will ensure that the assets are handled properly.
Another advantage of an IRA inheritance trust is that it can prevent creditors from making claims on the assets, which is a risk in many states if an individual is named as the beneficiary of an IRA account: “The Supreme Court has ruled that there should be no federal protections for IRA funds. However, Arizona has a state law exempting IRA beneficiaries from all claims of creditors. If you live in Arizona but your IRA trust was started in another state, it could be at risk.” As with all aspects of estate planning, it is key to understand and align to state laws and protocols when establishing an IRA trust. Ensure an IRA trust is legally recognized as a valid beneficiary by addressing these considerations:
- The IRS requires that the trust qualify as a “look-through” or “see-through” trust. This means the trust’s beneficiaries must be living and identifiable, so their life expectancies can be determined. This enables the account to take advantage of the IRA stretch strategy, where the distributions are stretched over the life expectancy of the trust beneficiaries. For example, only individuals like spouses and children, not charities or corporations, are eligible to receive IRA distributions.
- The trust needs to have the correct documentation. You will need to ensure that the trust is structured properly and executed by a qualified attorney. A simple will or generic trust will not suffice, nor will it hold up in court.
- The trust must be legally valid and comply with…state law.
Cautionary Notes
As with all estate planning vehicles, it’s important to speak with an expert about your specific circumstances, intentions and goals before rushing into the establishment of an IRA trust. There is no one magical estate planning tool that’s best for everyone, and there are some potential drawbacks to naming a trust as the beneficiary of an IRA account. Investopedia reminds us, for example, to keep tax and withdrawal implications in mind: “The IRA is maintained as an asset within the trust. Its distributions are taxed according to the type of IRA. If you have a traditional IRA, you will have to pay ordinary income taxes. If you have a Roth IRA, you will not have to pay taxes.”
When setting up any type of trust as part of an estate plan, do not underestimate the responsibilities that will fall to the trustee designated to administer the trust. A trustee is not an honorary role, and sometimes, it makes the most sense to secure the services of a professional trustee.The appointment of a neutral, experienced, professional fiduciary to administer a trust can be an especially wise decision if the trust’s financial arrangements are complex, or if conflicts are a looming possibility.
Given the significant responsibilities involved in serving in the fiduciary role of trustee, a type of bond, referred to as a fiduciary or trustee bond is frequently required. Essentially, fiduciary and trustee bonds serve as a guarantee that duties will be carried out in accordance with the law and in the best interests of beneficiaries. Colonial Surety makes it easy and speedy for fiduciaries and trustees in every state to obtain their bonds: simply: get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere.
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