In this Elder Law Minute, Wes Coulson explains the scenarios in which you should or shouldn’t name a living trust as beneficiary of an IRA.
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“Your Trusted Advisor on the Elder Care Journey”

Dent-Coulson Elder Law is dedicated to providing families in the St. Louis area with their Elder Law needs. Our practice areas include Asset Preservation Planning, Veterans Benefits, Medicaid Eligibility, Alzheimer’s Planning, Special Needs Planning, Estate Planning and more. We understand the financial challenges you may face as you and your loved ones grow older.

At Dent-Coulson Elder Law, our clients’ well-being is our number one priority. For immediate help, call (618) 632-7000, (217) 330-5500, or (314) 567-9292.

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Video Transcript:

Greetings, I’m Wes Coulson from Dent Coulson Elder Law and this will be your Elder Law Minute. We’re happy to present these because we think we can help inform you as to the ways in which we can help you and the things that you need to think about relative to the elder care and estate planning journey. Hope you enjoy!

IRAs and other what are known as “qualified retirement assets” require some special attention
in estate planning. As the first thing, if you have a living trust, your living trust cannot own an IRA or other retirement asset, a 401k, a 403b, a simple plan, a keyal plan, things of that sort during your lifetime. Those are all in the nature of IRAs and as we like to tell people, the I in IRA stands for individual. You can’t own an IRA together as a married couple, because a married couple is not an individual and neither is a trust.

Now the question is, “if you have a Living Trust should you name it as beneficiary of your IRA?” The answer to that question is that it very much depends on the language of the living trust. If you don’t have special provisions in the Living Trust that make your IRA an appropriate beneficiary, then the answer is no, but if you do then in many situations the answer is yes. You have the advantages of a Living Trust and if it’s set up correctly, your Living Trust, if it’s for your spouse’s beneficiary can still qualify for spousal rollover. If your children are beneficiaries, then one of the things that we can do, by have your living trust in the beneficiary, is throw that money in the pot with other assets and let’s say that your kids, one of them is in the 12% bracket, one of them is in the 22% bracket and one of them is doing really well in the 32% bracket, we can leave more Living Trust money to the one in the lower tax bracket, kind of equalize shares a little bit to take into account tax considerations but it gives some flexibility for when that IRA is withdrawn after you die to have a tax at a lower rate.

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Should You Name a Living Trust as Beneficiary of an IRA?

Creating a living trust is often seen as a valuable estate planning tool. It allows individuals to have control over their assets while providing for the efficient transfer of those assets upon their death. When it comes to retirement accounts, such as individual retirement accounts (IRAs), naming a living trust as the beneficiary may seem like an attractive option. However, this decision requires careful consideration and understanding of the potential consequences.

First and foremost, it’s important to recognize the benefits of designating a living trust as an IRA beneficiary. One key advantage is that it allows for the seamless transfer of assets within the trust upon the account holder’s passing. By doing so, the trust can continue to provide for the family without the need for probate court involvement. Additionally, a trust can provide greater control over how IRA assets are distributed to beneficiaries, especially in cases where beneficiaries may have special needs or poor financial decision-making skills.

Nevertheless, there are several considerations that individuals should be aware of when contemplating this decision. The most significant drawback is that naming a living trust as an IRA beneficiary can impact the tax treatment of the account. IRAs offer potential tax advantages, such as tax-deferred growth or even tax-free distributions in the case of Roth IRAs. However, the IRS has specific rules regarding trusts that can limit or negate those benefits.

One potential tax concern is the requirement for minimum distributions from the IRA after the account holder passes away. Generally, the IRS stipulates that beneficiaries must take required minimum distributions (RMDs) based on their age and life expectancy. However, when a trust is named as the beneficiary, those RMD calculations can change, potentially leading to higher tax obligations or even penalties for the trust and its beneficiaries. Notably, this issue primarily arises if the trust does not qualify as a “look-through” or “see-through” trust.

To qualify as a “look-through” trust, certain criteria must be met, such as having identifiable individual beneficiaries and other specific requirements. Failing to meet these criteria may result in the trust being treated as a “non-designated” beneficiary. Consequently, the IRA distribution must be withdrawn within a shorter timeframe or under less advantageous circumstances, leading to potential tax implications.

Naming a living trust as an IRA beneficiary also means that the trust will become the outright owner of the IRA assets. This can have a significant impact on the trust’s overall structure, administration, and even its intended purpose. Additionally, it may limit the flexibility of beneficiaries to make choices based on their individual circumstances, such as rolling over the IRA into their own inherited IRA or taking advantage of other potential tax planning strategies.

Ultimately, the decision of whether to name a living trust as the beneficiary of an IRA should be made after thorough consideration of the individual’s specific circumstances, estate planning goals, and consultation with a knowledgeable professional. It is important to assess potential tax implications and to ensure that the trust meets the necessary criteria to maintain the intended tax treatment. A skilled estate planning attorney or financial advisor can provide guidance to help navigate the complexities and ramifications of this decision.

In conclusion, while naming a living trust as the beneficiary of an IRA can offer benefits, caution should be exercised. The potential tax consequences and the impact on the trust’s structure must be carefully evaluated. Taking into account all relevant aspects will help ensure that this decision aligns with an individual’s overall estate planning objectives.