Upon death, if you have individual retirement accounts (IRAs), they will pass directly to the people you named on your beneficiary designation form. And unless you take extra steps, the named beneficiary can do whatever he or she wants with the account’s funds once you’re gone.
For several reasons, you might not want your heirs to receive your retirement savings all at once. One way to prevent this is to designate your IRA into a trust.
But you can’t just use any trust to hold an IRA; you’ll need to set up a special type of revocable trust specifically designed to act as the beneficiary of your IRA upon your death. Such a trust is referred to by different names but for this article, I’m simply going to call it an IRA Trust.
IRA Trusts offer a number of valuable benefits to both you and your beneficiaries. If you have significant assets invested through one or more IRA accounts, you might want to consider the following advantages of adding an IRA Trust to your estate plan.
1. Protection from creditors, lawsuits, & divorce
Assets passed through an IRA Trust are shielded from your beneficiary’s creditors (which includes lawsuit judgements) if those assets remain in the trust.IRA Trusts are also useful in protecting assets from the possible remarriage and divorce of a surviving spouse as well as potential future divorces of your children.
2. Protection from the beneficiary’s own bad decisions
In addition, an IRA Trust can also help protect the beneficiary from his or her own poor money-management skills and spending habits. When you create an IRA Trust, you can restrict when the money is distributed as well as how it is to be spent. For example, you might stipulate that the beneficiary can only access the funds at a certain age or upon the completion of college. Or you might stipulate that the assets can only be used for healthcare needs or a home purchase. You can get as creative as you want with the trust’s terms.
3. Tax savings
One of the primary benefits of traditional IRAs is that they offer a period of tax-deferred growth, or tax-free growth in the case of a Roth IRA. A properly drafted IRA Trust can ensure the IRA funds are not all withdrawn at once and the required minimum distributions (RMDs) are stretched out over the beneficiary’s lifetime. Depending on the age of the beneficiary, this gives the IRA years—potentially even decades—of additional tax-deferred or tax-free growth.
4. Minors
If you want to name a minor child as the beneficiary of your IRA, they can’t
inherit the account until they reach the age of majority. So, without a trust,
you’ll have to name a guardian or conservator to manage the IRA until the child
comes of age. With an IRA Trust, however, you name a trustee to handle the IRA management
until the child comes of age. At that point, the IRA Trust’s terms can
stipulate how and when the funds are distributed. Or the terms can even ensure
the funds are held for the lifetime of your beneficiary, to be invested by your
beneficiary through the trust.
Find out if an IRA Trust is right for you
While IRA Trusts can have major benefits, they’re not the best option for everyone. We can look at your situation and goals to help you determine if an IRA Trust is the most suitable option for passing on your retirement savings to benefit your family.
Dedicated to empowering your family, building your wealth and defining your legacy,
