If you’re concerned about protecting your retirement savings and providing for your loved ones, you may be wondering what to do with your IRA. This guide explains the estate planning benefits of leaving your IRA to a trust and what you should know if you're considering this option.
Can I Transfer My IRA to a Trust?
An IRA may not be transferred to a trust without causing the whole IRA to be taxed. But in practice, there is no need to transfer an IRA to a trust since IRAs avoid probate by having a “designated beneficiary,” and the principal of an IRA is exempt from being “spent down” for your long-term care needs. However, you may leave an IRA to a trust by naming the trust as a beneficiary of your IRA.
Why Leave an IRA to a Trust?
There are many reasons why you may want to leave an IRA to a trust. The beneficiary may be:
- A minor
- Irresponsible
- Experiencing substance or alcohol abuse issues
- A person with a learning or intellectual disability
- Dominated by a spouse
- Facing divorce or bankruptcy
You may also want to control where the IRA money goes if your designated beneficiary dies before the IRA is completely distributed. In all these cases, leaving your IRA to a trust where you set the rules can give you more control over how and when beneficiaries receive distributions. Similarly, an IRA is often left to an Inheritance Protection Trust to protect it from your child’s divorce or creditors and to keep the asset in the family.
What Type of Trust Can I Name as an IRA Beneficiary?
You can only use a trust to distribute your IRA by naming the trust as an IRA beneficiary if the trust qualifies as “see-through” under IRS rules. This means it must:
- Be a valid trust under your state laws.
- Have identifiable beneficiaries, such as your children.
- Be irrevocable upon your death, meaning the trust rules cannot change after you pass away.
The trustee or another authorized trust representative must provide the trust documentation to the IRA custodian by October 31 of the year following your death. This step is crucial to ensure the trust qualifies for "see-through" treatment, allowing beneficiaries to take distributions over the maximum period allowed by IRS rules.
All trusts that may be named as beneficiaries of an IRA fall into two categories of see-through trust: “conduit” trusts and “accumulation” trusts. A conduit trust simply acts as a conduit of the 10-year payout under the Further Consolidated Appropriations Act — also called the SECURE Act. In other words, whatever is taken from the IRA must be distributed immediately to the trust beneficiary, the trust acting as a conduit only.
An accumulation trust will more often be a better choice for the purposes described above. These trusts allow the trustee to keep the IRA proceeds in the trust and use them “as needed” for the benefit of the trust beneficiary or group of beneficiaries.
Navigating IRA Distribution Rules
The SECURE Act eliminated the “stretch” provisions that allowed a beneficiary to take the IRA distributions over their lifetime by requiring non-spouse beneficiaries, including trusts, to withdraw the full IRA balance within 10 years of the account holder's death.
However, the beneficiary usually only has to take very small distributions for the first nine years, allowing for almost 10 years of tax-free growth on the IRA, with the remaining balance distributed by the end of the 10th year. Some eligible designated beneficiaries, including minor children, people with disabilities, and beneficiaries no more than 10 years younger than the account holder, may qualify for extended payout periods.
Word to the wise: it is a good idea to have an experienced elder law estate planning attorney handle the retitling of the decedent’s IRA to avoid a taxable event from occurring.
How to Leave an IRA to a Trust
If you want to leave your IRA to a trust to protect your assets for your intended beneficiaries, follow these steps:
- Consult an attorney: Work with an elder law estate planning attorney to ensure your trust and beneficiary designations align with your goals.
- Select trust type: Choose a conduit trust if you want IRA distributions to pass directly to beneficiaries, or an accumulation trust if you need the trustee to control distributions for added protection.
- Update beneficiary form: Contact your IRA custodian to name the trust as your beneficiary and complete the required paperwork.
- Draft the trust: Make sure your trust meets IRS “see-through” requirements with the help of your attorney.
- Plan to submit documentation: Ensure the trustee or representative is prepared to provide the trust document to the IRA custodian by October 31 of the year after your death.
- Review regularly: Revisit your IRA and trust documents after major life events in your family or changes in tax law to keep your estate plan up to date.
Why Choose Ettinger Law Firm?
Ettinger Law Firm is a dedicated elder law and estate planning firm. We have prepared thousands of estate plans for generations of families across our 35 years of legal practice and 12 locations in New York State. We focus on using trusts in estate plans to save our clients and their beneficiaries countless thousands of dollars annually. Our firm has pioneered the Inheritance Protection Trust and continues to publish thought leadership insights on new estate planning techniques and strategies weekly.
Our client relationships span lifetimes and generations, during which we provide ongoing legal counsel to develop and maintain estate plans that provide security in a changing world.
Schedule a free consultation or call us at 1-800-500-2525 today to discuss leaving your IRA to a trust and other strategies to protect your legacy.
