Woman signing estate planning documents

What You Should Know About Naming a Trust as a Beneficiary of an IRA

You can do a lot of things with living trusts that you cannot do with a standard will or with many other types of documents. People use different types of trusts to avoid probate, reduce the expenses of estate administration, protect beneficiaries from themselves, qualify for help from Medicaid to pay for the cost of a nursing home, reduce estate taxes, and many other significant goals. 

The less your estate has to pay in taxes, the more money there is for your beneficiaries. If you accumulated a substantial amount of money in your individual retirement account (IRA), you might want to include that asset in your trust. A Texas estate planning attorney can answer your questions about whether doing so would be a good idea in your situation. Here is what you should know about naming a trust as a beneficiary of an IRA. 

IRAs as Transferrable Assets

Many people assume that because they own the IRA, the asset will automatically be part of their estate and pass under the terms of their will or trust. That is a mistaken assumption. Similar to a life insurance policy, an IRA passes to whomever the owner designated as the beneficiary. 

If you designate your trust as the beneficiary, you could avoid some common problems people face when trying to pass this asset on to the next generation or other beneficiaries. Your IRA could still contain a large balance at the time of your death, even if you took the required minimum distributions (RMDs) every year after you turned 72. In fact, if your investments did well, your IRA balance could be greater at the time of your death than it was when you turned 72 years old.

Advantages of Naming Your Trust as the Beneficiary Instead of an Individual

Life is complicated. Using a trust specifically tailored to certain situations can help you avoid fall-out from them. There are advantages to naming the trust as the beneficiary of your IRA if:

  • You do not want a beneficiary to receive the lump sum of your IRA balance when you die. If the trust owns the IRA, the trustee can distribute the assets according to the terms of your trust.
  • You might have a beneficiary who cannot legally own an IRA. For example, a minor cannot own an IRA.
  • You want someone else to receive the IRA after the initial beneficiary dies. For example, you might want your spouse to have access to the funds during their lifetime and the remainder to get distributed to your children after your spouse dies. If your trust owns the IRA, you can accomplish this end. If your spouse is the beneficiary of the IRA instead of your trust, the asset will become part of your spouse‚Äôs estate. 
  • If you name an individual as a beneficiary of the IRA, a creditor could take the asset away from the individual. If, on the other hand, your trust is set up properly to provide protection from creditors, and the trust is the beneficiary, not the individual, the individual will enjoy some creditor protection.
  • Inheritance issues can get awkward when there is a second marriage or blended family. If you name your trust as the beneficiary of the IRA, rather than your current spouse or some other individual, your trust terms can control the distribution of this asset.

These are but a few examples of the issues you will want to talk with your Texas estate planning attorney about if you have an IRA account. Contact our office today for help with your case, we offer a free consultation.