If Your Trust Is the Beneficiary of Your IRA, It Could Cost Your Kids a Boatload | Estate Plan Pros
If Your Trust Is the Beneficiary of Your IRA, It Could Cost Your Kids a Boatload

Discover:Create

If you have the wrong kind of trust, naming it as the beneficiary of your retirement account could cost your kids a lot in extra taxes.  How?  It happened because you’ve just forced your heirs to report the entire amount as income.  

When you inherit a retirement account, several things change immediately.  The first is that the account will look at the new owner to re-calculate the measuring life on the account.  If they can see a person, they’ll use that person’s age.  This is called the “stretch out rule”.   But, if they just see an entity like most trusts that have no age, there is no stretch out, and the beneficiary will be forced to close out the IRA account and take the income tax hit.  If you have an ordinary trust, naming it as the beneficiary kills the possibility of a stretch-out.

The second big change when you inherit a retirement account is that there is no longer any early access penalty.  You could withdraw the entire amount, or something less, and the only consequence is that you will owe income tax on the distribution.  This is why the US Supreme Court in  Clark v. Ramiker decided that creditor protection laws do not protect inherited retirement accounts. 

What about the right kind of trust?

The right kind of trust is specifically designed to handle retirement accounts, and meet the four requirements of a see-through trust outlined by the IRS.  A retirement trust allows you to preserve the stretch out for your beneficiaries, and put into place the plan and asset protection a trust can create.

Using this kind of trust, you can:

  • Help keep the IRA in the family, by avoiding having a child name his or her spouse as a beneficiary, and seeing the money go to that new spouse’s children
  • Protect the asset in case of a divorce
  • Manage the account for beneficiaries who are young children, elderly or disabled
  • Give direction and security for a beneficiary with poor money management skills

Unless you have the right kind of trust, don’t send your retirement funds there.  But do consider the benefits to your children of using the right kind of trust for your retirement funds.

Tags:IRA Asset Protection

Share This Post:

Erik Hartstrom

Erik is the founder of Estate Plan Pros, a leading estate planning practice in Elk Grove.  Erik’s practice focuses on Estate Planning Law. In Estate Planning, Erik works with clients to make the process simple, so clients can focus on more important things. He is a local authority for specialized estate planning instruments, like Special Needs Trust, Irrevocable Trusts, or other focused documents. Erik has litigated, negotiated, and mediated the gamut of family law cases. With this unique perspective as a family law and estate attorney he can often spot issues otherwise overlooked. Prior to graduating he worked as a legislative analyst for a non-profit organization, and volunteered as a youth counselor. Erik currently participates in local politics and is an active member of his local church. Erik is very happily married and has two young sons. Together, his family loves to get outdoors and enjoy the varied activities the Sacramento region has to offer.


Related Posts


Ready to Start Your Estate Plan? Schedule My Appointment