Making a trust an IRA beneficiary can be complicated.
You have a traditional IRA as part of your retirement planning.
This tool serves you well and is straightforward in providing retirement income.
Even so, an IRA can complicate matters in estate planning.
According to a recent Wealth Advisor article titled “Should A Living Trust Be Beneficiary Of Your IRA?,” you should consider taxes when choosing an IRA beneficiary.
An IRA beneficiary who is not an individual person typically is required to have assets fully distributed within five years of the death of the original owner.
Although a trust, business entity, or estate can be named as the IRA beneficiary, there is the potential of higher taxes as a result of accelerated distributions.
Although certain trusts can qualify as “see-through” or “look-through” trusts under IRS rules, generally speaking the IRA must be distributed within ten years (with limited exceptions).
You also may find a penalty exemption if you name the revocable living trust instead of your spouse as the IRA beneficiary.
A recent IRS ruling involved a married couple who used the living trust of a wife as the primary beneficiary for an IRA, instead of the wife as the primary beneficiary.
Because the woman was the sole trustee and the sole beneficiary of her living trust, the IRS allowed her to exercise her spousal option for an inherited IRA to roll over the IRA within 60 days into an IRA under her name.
This option allowed her to take the required minimum distributions based on her life expectancy and designate her own IRA beneficiaries.
While this option for using a living trust as an IRA beneficiary worked in this situation, the widow had to seek a private ruling from the IRS to clarify her tax results.
This took both time and money.
When selecting an IRA beneficiary, work with an experienced estate planning attorney to select the best option for your unique needs.
Reference: Wealth Advisor (Dec. 29, 2020) “Should A Living Trust Be Beneficiary Of Your IRA?”