Designating a Trust as an IRA Beneficiary
Trusts are legal arrangements used to manage money or property. The person who creates the trust, called a grantor, gives money or property to the trust which is managed by one or more trustees according to the terms of the trust agreement. The trustee(s) must follow any written instructions included in the trust agreement and also must follow state law when distributing assets. A trust can be designed with different provisions addressing various concerns such as estate planning, tax liability, managing incapacity and dynasty planning.
How to Designate a Trust as an IRA Beneficiary
Setting up a trust as an IRA beneficiary is a very easy thing to complete. After establishing the trust, you simply have to list the trust as beneficiary to the IRA account. Then you will have to go through some paperwork or an online portal to complete the steps. While this may be easy, do not hesitate to ask for the assistance of a finance professional to complete this task for you especially in order to avoid mistakes.
Benefits in Designating a Trust as an IRA Beneficiary
There are various benefits in designating a trust as an IRA beneficiary.
Control Over the Funds
This is probably the biggest reason for using a trust as an IRA beneficiary. If you name a living person as beneficiary, that person may not use or withdraw from your funds properly. The terms of an estate plan often require that assets be used according to the express wishes of the deceased. By naming a trust as beneficiary, you can avoid some responsibility and loss of privacy by protecting your assets from being improperly managed after your death.
In order to ensure that none of the named beneficiaries will abuse their power or position, designating a trust as beneficiary allows you to press certain conditions on them before they are allowed to receive any money from this type of account.
Designating a trust as beneficiary gives you the opportunity to choose whether or not to accept any tax consequences that could result from withdrawing IRA funds.
Freedom to Choose the Beneficiary
This is a good strategy especially if you wish to leave the IRA to someone else aside from your spouse. This is also most beneficial if you wish to transfer the IRA to specific beneficiaries who could be minors or someone with special needs.
Protects the Funds From Creditors
Naming a trust as the beneficiary of your IRA account protects your money from being considered part of your estate in determining if any creditors owe you.
Drawbacks in Designating a Trust as an IRA Beneficiary
As beneficial as it sounds, there are some drawbacks in designating a trust as an IRA beneficiary.
Costs Associated in Setting up a Trust
Just like every other legal document, a trust also comes with its own filing fees and other administrative expenses. In addition to this, it takes time and effort just to set up the necessary paperwork for this arrangement.
Complexity in Setting up a Trust
Naming a trust as IRA beneficiary is not that simple because there are certain rules you have to follow. It’s a lot more simple to just name a beneficiary to your IRA account than designate a trust as beneficiary to it.
Losing Control Over Fees and Expenses
If you want to add or change an account beneficiary, you will have to go through the lengthy process of setting up a new trust agreement which may take weeks longer than usual. This could be costly in terms of transaction costs, attorney fees and taxes from required distributions from the IRA.
Losing Some Tax Benefits
When you name a trust as beneficiary, you will lose several tax benefits that are provided to your beneficiaries. For instance, if the assets in an IRA were to be inherited by your spouse in the event of your death, the IRA could be transferred to the spouse’s IRA free of taxes.
Designating a trust as beneficiary is exercising one’s right over how money should be distributed after his or her death. It can protect your heirs from financial issues and other problems. However, keep in mind that it comes with certain costs and complexities when setting up such an arrangement. You may consider asking for professional help for this process especially since this involves handling money related matters.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.