What Happens When the IRA Beneficiary is a Trust?


First, what is an IRA and what is a beneficiary?

An IRA is an individual retirement account. It is an investment account that has tax advantages and helps you save for retirement. The beneficiary of an IRA account is the person designated to receive the funds after the person who sets up the account (the original owner) passes away.

What is an IRA Trust?

An IRA (individual retirement account) trust is a special type of trust that can be designated to receive distributions from an IRA.

What happens to distributions from the IRA?

If you create an IRA trust and designate it as the beneficiary of your IRA, 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 and distribute the trust assets for the trust beneficiaries according to the IRA.

Why would I make a TRUST be the BENEFICIARY of the IRA instead of my child?

When you designate an IRA trust as the IRA beneficiary, there are many advantages for you and your family:

  • Spendthrift protection- the beneficiaries are protected from overspending the assets
  • Creditor protection or asset protection so that the beneficiary’s creditors cannot take (or have access to) the trust assets
  • Divorce protection
  • Special needs trusts for disabled beneficiaries who qualify for government assistance can receive a portion of the IRA trust assets
  • "Dead hand control"- Instead of worrying about what happens after you're gone and if your IRA beneficiary could bust the IRA and take all the IRA assets out at his or her discretion, you allow the trustee of the IRA trust to oversee the decisions over when and how to distribute the IRA funds.

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