Trusts have limitations regarding IRAs.
You have an Individual Retirement Account (IRA).
You also have a trust.
You are in the process of “funding” your trust.
As you review your assets, you wonder what should be placed in the trust.
According to a recent Investopedia article titled “How Can I Put My IRA In a Trust?,” your trust cannot hold your IRA while you are alive.
This applies to traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.
Why is this?
IRAs are designed for specific goals.
One purpose of IRAs is to provide tax-deferred retirement savings for those who do not have an employee-sponsored plan.
They can also be helpful for those with employee-sponsored plans as they provide a place for these assets to grow through an IRA rollover after changing jobs.
Contributions can only be made under certain criteria.
The owner must have taxable income to support any contributions.
A non-working spouse could also have an IRA, but the contributions must be made by the working spouse.
As the name indicates, “Individual” Retirement Accounts are for individuals.
These cannot be owned jointly or titled to a small business or trust.
Once the IRA is owned by an individual, it cannot be transferred without penalty.
If transferred to a trust, the entire IRA will become taxable as ordinary income and are no longer considered part of the IRA.
If the owner is under age 59 ½, there will be an additional early withdrawal penalty.
The only viable option when it comes to transferring an IRA to a trust is by designating the trust as the postmortem beneficiary (i.e., when the IRA owner is deceased).
When you die, the trust can establish an inherited IRA.
What are the benefits of naming trusts as the beneficiary to IRAs?
The owner can provide direction to heirs on how to use the funds.
Certain direction and guidelines can also be given to protect the IRA distributions “for” certain beneficiaries, like those who are minor children or who have special needs and receive means-tested public assistance benefits.
Although there are some benefits to designating trusts as beneficiaries, doing so can also have undesirable consequences.
Trusts may be subject to accelerated withdrawals without proper “pass through” terms.
This could burden the beneficiaries.
A trust could nullify spousal inheritance provisions for the IRA.
Before you designate a trust as a beneficiary of your IRA, discuss your goals and circumstances with and experienced estate planning attorney.
This attorney will help create the appropriate plan for you and your loved ones.
Reference: Investopedia (November 26, 2019) “How Can I Put My IRA In a Trust?”