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Naming a Trust as a Beneficiary of Your IRA

Author: Louise Paglen, Estate Planning Attorney, The McIntosh Law Firm, P.C.

Beneficiary designations on IRA accounts are a great method for distributing assets upon your death. In many cases, but not all, there are benefits to naming a Trust as the beneficiary of your IRA or other tax qualified account.

  • Planning for Second Marriages. Most IRA owners name their spouse as their primary beneficiary and their children as contingent beneficiaries. Upon the death of the IRA owner, the surviving spouse inherits the account and the option to update the beneficiary designations. The new owner of the inherited IRA can name anyone - a subsequent spouse, children of another marriage, friend, relative, or charity - as the new beneficiary of the inherited IRA account. By naming a Trust as the beneficiary, you can provide income for your spouse while also maintaining control over the naming of successor beneficiaries.
  • Asset Protection for your Beneficiaries. An individual who inherits an IRA has the right to withdraw all the assets in one lump sum, even if doing so is not in their best interest. There is no requirement that your beneficiary stretch out distributions to minimize income taxes or maximize tax-deferred growth. A trust beneficiary receives distributions only as directed by the Trust document. So, if you want to ensure that your loved one’s inheritance is protected from creditors, poor judgment, or romantic influences, designating a Trust as the beneficiary of your IRA may be advisable.
  • Protecting Benefits for those with Special Needs. A disabled individual who receives public benefits such as SSI or Medicaid risks losing those benefits when they inherit directly from an IRA. In these cases, it is almost always preferable to designate a properly drafted supplemental needs trust as the beneficiary of the IRA account rather than the disabled individual.

Naming the Trust as a beneficiary of your IRA account can have some benefits, but it can also be risky and is not recommended in all cases. Be sure to have your Trust reviewed by a qualified estate planning attorney before simply naming it as a beneficiary of your retirement account. Failure to seek legal advice could result in unintended and expensive consequences.