Monday, December 23, 2013

Should I Name My Trust beneficiary of my IRA?

I often say that your estate plan is only as good as your beneficiary designations. So why then for some what is their biggest asset, and IRA or a qualified plan, would they not list their Trust as beneficiary? ANSWER- Either their trust has not been drafted to accommodate this or they were unaware of its benefit or misinformed about the consequences.

Trust are often my favorite tool in the tool box and are no more appropriate that in the world of qualified money. A properly drafted trust can get the best of both worlds; conduit treatment for RMD purposes, and asset protection for the beneficiary, if desired.

Now there are some reasons why a Trust might better be suited as an accumulationt Trust rather than a conduit trust, most notably when you have a special needs beneficiary and the governmental benefit outweigh that tax advantage of RMD distributions. But for most others, a comprehensively drafted trust as beneficiary of an IRA will serve the beneficiary well.

What about RMDs? If "The Smith Trust" is listed as the beneficiary, you need to dig further into the trust. Life expectancy distributions would, in this case, be based on the oldest beneficiary. Not the worst case result. If there is a charity listed as a current or contingent beneficiary, there is a good chance that the IRA must follow the 5 year payout rule. If you have beneficiaries of differing ages, I suggest naming as beneficiary "the sub trust created for Bill Smith Jr in the Smith Family trust" along with Bill Jr's share %. This way each child or beneficiary will get life expectancy distributions based on their particular RMD table.

For maximum benefit and protection, I will often draft a standalone Retirement Trust and name it as the sole beneficiary of an IRA. This is an irrevocable trust whereby the Trust takes an RMD distribution based on the oldest beneficiary and the Trustee has authority to "sprinkle or spray" the after tax distribution among the beneficiaries as the trustee sees fit. This would be an excellent solution for troubled, at-risk, or divorce prone beneficiaries.

Under Treas. Reg. § 1.401(a)(9)-4 Q&A 5(b) the requirements for a Trust to qualify as a designated beneficiary are:

(1) The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
(2) The trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee.
(3) The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable from the trust instrument within the meaning of A-1 of this section.
(4) The documentation described in A-6 of this section has been provided to the plan administrator.

Too often do IRA's go outright by way of beneficiary designation, for the informed advisor and savvy client, they don't have to.

Justin Peltier is an estate planning attorney with offices located in Merrimac, MA with the sole focus of estate planning, elder law, asset protection, trust and probate administration and business planning. Please view our website for more information at or join our social media community below. You can also reach me directly at Thank You.