Naming a trust as a beneficiary of an IRA

| Jul 26, 2019 | Estate Plans |

A common way for Pennsylvania residents to save for retirement is with an individual retirement account (IRA). The potential problem with setting up an IRA is that the account holder could pass away before having the opportunity to take out the money at the appropriate time. One possible solution is designating a trust as the IRA beneficiary.

The process of naming a trust as an IRA beneficiary typically starts by choosing this option when an IRA is set up with a brokerage. As for the reasons to name a trust as an IRA beneficiary, it’s an appealing option since it allows for more control over how the money will be paid out.

 

Providing clear disbursement instructions can be especially beneficial if someone other than a spouse – e.g., a child, grandchild, or another family member – is named as an IRA beneficiary.

Designating a trust as an IRA beneficiary also allows an account holder to enjoy the tax benefits associated with an IRA while still having better control of funds. Funds are protected from creditors as well. This option can also be helpful for instances where the beneficiary is a minor child or someone considered a frivolous spender.

However, the funds related to an IRA do not automatically go into the trust. In fact, it’s typically advised that funds remain in the IRA so the account’s tax benefits can be enjoyed until dispersion begins. If multiple beneficiaries are named, disbursements will be based on the oldest beneficiaries’ age.

An estate planning attorney might also take the steps necessary to name a trust as a beneficiary of an IRA. However, if the intention is for IRA funds to go a spouse, it may be advised to simply name the spouse as the beneficiary so they can take advantage of the spousal rollover benefit. A lawyer may also set up trusts to protect non-IRA assets.