Should a trust be named as beneficiary of an IRA?

In this episode, Chris Berry answers the question: Should a trust be named as beneficiary of an IRA?
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Attorney and Financial Advisor Chris Berry of Castle Wealth Group answer questions on retirement and estate planning every Wednesday at 1pm. Register here or give our office a call at 844-885-4200.

Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi offices.

Castle Wealth Group helps families with their legal, financial, and tax planning for their retirement and legacy.

With the use of legal structures like revocable living trusts, Castle Trusts (asset protection trusts), Chris Berry and Castle Wealth Group can help your family plan, protect, and preserve what is important through their Retirement and Legacy Blueprint Process.

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Individual Retirement Accounts (IRAs) are popular investment vehicles for retirement savings. As an IRA owner, you have the option to name a beneficiary, who will inherit the funds in the account after your death. One option to consider is naming a trust as the beneficiary of your IRA. While this may be a suitable choice for some, it may not work for everyone. In this article, we will explore the pros and cons of naming a trust as the beneficiary of an IRA.

Pros:

1. Protection for the heirs:

One of the main reasons to name a trust as the beneficiary of an IRA is to provide protection for your heirs in case they have creditor or divorce issues. When a trust is named, it acts as a shield between the IRA funds and the heirs, ensuring that the assets are protected and distributed according to your wishes, even in case of legal issues.

2. Control over asset distribution:

When you name a trust as the beneficiary of your IRA, you have more control over how the funds are distributed after your death. The trust provisions can specify how much money each heir receives and when. This allows you to tailor the distribution of the assets to your heirs’ specific needs and circumstances.

3. Estate planning benefits:

Naming a trust as the beneficiary of your IRA can also provide estate planning benefits. For instance, if you have minor children or loved ones with special needs, the trust can help ensure that their needs are met without jeopardizing their eligibility for government assistance.

Cons:

1. Complexity and expense:

Creating a trust can be complicated and expensive. There are legal fees associated with drafting a trust agreement, and ongoing administrative costs to maintain it. You may also need to hire a professional trustee to oversee the trust, which can add additional costs.

2. Strict distribution rules:

When a trust is named as the beneficiary of an IRA, the distribution rules can be more rigid than if individual heirs were named. The IRS has strict requirements for how assets are distributed from a trust. Failure to adhere to these rules can result in hefty taxes and penalties.

3. Limits on stretch IRA planning:

One significant disadvantage is that naming a trust as the beneficiary of an IRA limits the ability to use stretch IRA planning. Stretch IRA planning allows beneficiaries to take distributions over their lifetime, potentially reducing the tax burden. However, the stretch is only available if individual beneficiaries are named and meet certain requirements. If a trust is named, it may not be eligible for stretch IRA treatment.

In conclusion, naming a trust as the beneficiary of an IRA has advantages and disadvantages. While it can provide protection for heirs, provide control over asset distribution, and estate planning benefits, it can be complicated and expensive to set up and administer. It is essential to weigh up the pros and cons and discuss your situation with your financial advisor to see whether naming a trust aligns with your estate planning goals.