Steven Merrell, Financial Planning: Is your trust a good IRA beneficiary?

Peninsula Premier Admin

Question: I recently created a living trust as part of my estate plan. Should I name my living trust as the beneficiary of my IRA?

Answer: When it comes to naming the beneficiaries on an IRA, I generally like to keep things simple. However, there are some situations where an IRA owner might need to exercise additional control over how the IRA is inherited. These situations are usually best addressed by naming a trust as beneficiary.

A common reason for naming a trust as an IRA’s beneficiary is to accommodate the personal circumstances of the IRA owner’s ultimate beneficiaries. For example, if your ultimate beneficiary has special needs, a trust can help that person avoid direct ownership of assets that might reduce her eligibility for government benefits.

You might also find a trust helpful if your ultimate beneficiary is a minor. Since minors cannot legally inherit IRAs directly, a trust could help settle the estate more quickly by assuring the IRA custodian that someone is there to help look after the minor’s inheritance.  A trust can also be set up with spendthrift provisions to help protect the inherited assets from beneficiaries with addictions or other challenges.

Naming a trust as your IRA’s beneficiary might also be the best way to handle complex family situations.  For example, a divorced individual may want his second wife to receive the required minimum distributions from his IRA during her lifetime, but allow the children from his first marriage to inherit whatever is left. The easiest way to balance both of these goals is to name a trust as your IRA beneficiary.

While trusts can be helpful in certain situations, they can create their own complexities. Unless the trusts are properly written, they can cause tremendous headaches for your heirs as they try to settle your estate. Here are some things you should keep in mind.

Use an attorney who has experience with both trusts and IRAs. Confirm that your IRA custodian will accept your trust as beneficiary. Not all do. Unfortunately, you can’t always rely on what you are told when you call your custodian’s customer service number, so request a copy of your IRA custodial agreement and review it carefully with your attorney.

The living trust you use in your estate plan may include provisions that work against your IRA beneficiaries. Instead of using that trust, consider creating a testamentary trust, or a trust that comes into effect upon your death, specifically for the purpose of inheriting the IRA. The name of this trust must be provided to the IRA custodian by Oct. 31 of the year following the death of the IRA creator.

Only individuals get the benefit of the 10-year rule. Non-individual beneficiaries, like charities, have to empty the inherited IRA within five years of the owner’s death. If one of your trust beneficiaries is a charity, then all the beneficiaries may be subject to the five-year rule. You can get around this by having different trusts named as beneficiaries of your IRA — one for individuals and another for non-individuals.

Avoid language that would make your trust liable to pay other estate debts and expenses. Doing so could result in your estate (a non-individual) being seen as one of the IRA’s beneficiaries, effectively making all beneficiaries subject to the five-year rule.

Give careful consideration to who will be the trustee of the trust. The trustee should understand the importance of protecting the individual beneficiaries of the IRA and where to turn for help—presumably the attorney.

IRAs and trusts make strange bedfellows. While there may be good reasons to name a trust as the beneficiary of your IRA, make sure you get the legal help you need to protect your heirs and your assets in the process.

Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to

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