When it comes to planning for the inheritance of your IRAs (and other retirement funds), first be sure to review all of your various IRAs and their beneficiary designations. Second, confirm that all of your beneficiary designations are current and that you have elected the most "efficient" beneficiaries.
While your trust may be the beneficiary of your life insurance and perhaps some non-qualified accounts, it may not be the best option when it comes to your IRAs.
The confusion between IRA beneficiaries, trust beneficiaries, and IRA beneficiaries by way of IRA beneficiaries is a common confusion. However, failing to understand the nuances and the consequences of those nuances may end up costing your estate and heirs. Big time, too.
The Slott Report took up the charge recently and offered a definitive answer worth consideration for those hoping to mix their trusts and IRAs.
The question (and article): “How Many Beneficiaries Are There With a Trust?”
The Answer? Just one: the trust. Even if there are 20 beneficiaries to the trust there is just the one beneficiary to the IRA and that is the trust.
The difference comes out in the balance and the math at the end. Naming a trust as beneficiary can seem like an easy way to spread an IRA among the trust beneficiaries you have already chosen as its ultimate beneficiaries. It is not the same thing, however, and that may affect the usefulness of the IRA.
After all, IRAs can make for uniquely useful bequests because they can be stretched out over the life of the inheritor. Unfortunately, when the trust is the beneficiary, then the math changes entirely. How? The eldest beneficiary that determines the age.
How and when distributions happen is, most likely, at the discretion of the trustee rather than the would-be IRA owner. Sometimes this multi-tiered approach can work for a family, but more often than not it is not fully understood before the papers are signed and only dealt with after the fact.
Note: All that noted, there are ways to structure a trust as beneficiary, especially when children are minors, there are children with "special needs," and perhaps concerns regarding substance abuse or spendthrift tendancies. However, such trusts must be carefully structured and meticulously coordinated via beneficiary designations.
Always consult your estate planning attorney when considering the trust, its assets, and any time you might wish to elect the trust as a beneficiary to this account or the other.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
Reference: The Slott Report (May 30, 2014) “How Many Beneficiaries Are There With a Trust?”
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