With IRAs and Qualified Plans, after the death of the “Participant” (the lifetime owner), there are required minimum distributions based on the life expectancy of the beneficiary. Often, people think that an individual must be named as the beneficiary of the retirement assets in order to use the beneficiary’s life expectancy and to prevent a forced faster distribution. But, that isn’t the case. A trust may be designated as the beneficiary. As long as the trust meets a few technical requirements, the IRS will look through the trust to its beneficiaries and use their life expectancies. One of those requirements is that the trust must be irrevocable by the death of the Participant. So, for example, if you name somebody else’s revocable trust as the beneficiary and that person survives you, that won’t work. But, if you (the Participant) name your own revocable trust, that would work because your trust becomes irrevocable at your own death.
Why might you want to name a trust as beneficiary? A trust isn’t necessary in every circumstance, but they can provide benefits. Here are a couple of the benefits a trust can provide:
- Asset Protection. During the Participant’s lifetime a Qualified Plan has unlimited protection in bankruptcy and an IRA has protection up to $1 million. However, a recent Supreme Court case found those bankruptcy protections don’t apply to an inherited IRA or Qualified Plan. A trust can provide an asset protection envelope for inherited assets which otherwise would not be protected, including IRAs and Qualified Plans. In most jurisdictions, if a trust has a third-party trustee and a fully discretionary standard, it provides asset protection.
- Asset Management. If a beneficiary lacks the maturity or discretion to manage their own assets, a trust may be ideal. Depending upon how the trust is drafted, it still may use the beneficiary’s life expectancy when determining required minimum distributions, which determine how long you can keep the money in the plan and keep the tax advantages of the IRA or Qualified Plan.
If your beneficiaries could benefit from the asset management or asset protection advantages of a trust, consider naming a trust for their benefit as the beneficiary of your IRA or qualified plan. Naming a trust as beneficiary of an IRA or Qualified Plan doesn’t need to be scary, even at Halloween.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128