What Happens When the IRA Beneficiary is a Trust?


An IRA (individual retirement arrangement) trust is where an IRA participant or the IRA owner designates a trust as the beneficiary of his or her individual retirement account. In that case, the required minimum distributions that are payable out of the IRA normally to an individual beneficiary instead would be paid to the trust. The trustee of the trust would hold the trust assets for the beneficiaries who normally would've been the IRA account beneficiaries. In other words, we're designating a trust instead of an individual as a beneficiary of the IRA.

In an IRA beneficiary trust, you get:

  • spendthrift protection- the beneficiaries protected from his or her own spending proclivities
  • creditor protection or asset protection so that the beneficiary’s creditors cannot get to the trust assets
  • divorce protection
  • special needs trusts can be structured in IRA beneficiary trusts
  • estate planning
  • dead hand control- instead of worrying about what happens after you're gone, where an IRA beneficiary could bust the IRA and take all the IRA assets out at his or her discretion, you allow the trustee of the trust to make that decision over when and how to distribute the IRA benefits

Basically, there are two kinds of IRA trusts: a conduit trust and an accumulation trust. A conduit trust gives you very limited asset protection. In an accumulation trust, you can keep the required minimum distributions in trust, but because of the SECURE Act, we're now required to make the distribution of the IRA within 10 years in the case of an inherited trust. The benefit is that it gives you stronger asset protection than a conduit trust.

There are lots of planning issues that come up because of the SECURE Act.

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