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For many, their Traditional Individual retirement account (IRA) represents their largest financial asset. Most retirees name adult individuals as their beneficiaries. Yet some IRA owners want to name a trust as a beneficiary of their IRA.
Naming a trust as an IRA beneficiary can have adverse income tax consequences. However, if the trust qualifies as a “see-through trust”, then after the iRA owner’s death, you can through the trust to the underlying trust beneficiaries, and the required minimum distribution rules will apply as if those trust beneficiaries were designated as beneficiaries.
One of the four requirements to get the favorable see-through trust tax treatment is that the trust be irrevocable. But just because you name an irrevocable trust as a beneficiary of your IRA does not mean that you cannot change our beneficiary.
It is not an irrevocable beneficiary designation. It is an irrevocable trust that is a beneficiary of your IRA. But an IRA owner can change their beneficiary at any time. So you’re not locked into anything permanently by naming an irrevocable trust as a beneficiary of your IRA.
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Individual Retirement Accounts (IRAs) are a popular investment tool for individuals who want to save for retirement. IRAs allow individuals to save a portion of their income in a tax-deferred account, which can grow over time. However, the rules surrounding IRA beneficiary designations can be complex and confusing, especially when an irrevocable trust is involved. In this article, we will examine whether the IRA beneficiary designation of an irrevocable trust is truly irrevocable.
Firstly, it’s important to understand what an irrevocable trust is. An irrevocable trust is a type of trust that cannot be revoked or amended once it has been created. This means that once assets have been transferred to the trust, they are no longer under the control of the original owner. An irrevocable trust can be useful for estate planning purposes, as it can help individuals to reduce their estate tax liabilities by removing assets from their taxable estate.
When it comes to IRA beneficiary designations, the rules can be complex, especially when an irrevocable trust is involved. A beneficiary designation is a legal document that tells the IRA custodian who should receive the account assets after the account owner passes away. The beneficiary designation can be changed at any time by the account owner, as long as they are still alive and competent. Typically, account owners can name any individual or entity, such as a trust or charity, as their IRA beneficiary.
However, when an irrevocable trust is named as the beneficiary of an IRA, the rules change. While the IRA beneficiary designation is technically still revocable, the account owner will need to obtain the consent of the trustee of the irrevocable trust before making any changes. This is because the assets in the IRA will be owned by the trust, not the individual account owner. To make any changes to the IRA beneficiary designation, the account owner will need to work with the trustee to ensure that the changes are consistent with the terms of the trust.
So, is the IRA beneficiary designation of an irrevocable trust truly irrevocable? The answer is technically no, as the account owner can technically change the beneficiary designation. However, the process of changing the beneficiary designation is much more complex when an irrevocable trust is involved. This is because the assets in the IRA will be owned by the trust, not the individual account owner. To make any changes, the account owner will need to coordinate with the trustee to ensure that the changes are consistent with the terms of the trust.
In conclusion, the IRA beneficiary designation of an irrevocable trust is technically still revocable, but the process of making changes is much more complex. If you are considering naming an irrevocable trust as the beneficiary of your IRA, it’s important to work with an experienced attorney who can help you navigate the complex rules surrounding IRA beneficiary designations and ensure that your estate planning goals are met.
I’m checking back. Thanks for your videos. I did do a conduit trust for my Mom who has passed. My Dad is the beneficiary now and I am trustee. The IRAs were transferred to an IRA trust account at Fidelity and Vanguard and I was able to use my Dads tax ID in the trust account and I have Vanguard distribute the RMD directly to the beneficiary. The 1099Rs will have my dads tax Id. No trust tax Id has been necessary. I don’t recommend getting a trust tax Id as long as you have one beneficiary. Managing the conduit trust is a bit of a hassle but I have paid no legal fees since I set up the IRA trust for my mom. When my Dad passes, my hope is to move the IRA trust assets into IRA accounts for the children. This seems to be working well.
Can I roll over a portion of my 401k into an irrevocable trust along with my home and other assets for asset protection against Medicaid, creditors, etc.? In the state of Washington they have a five year look back from Medicaid and a buy down of assets before going to a nursing home. I am 65 and in good health. Thank you.
some companies do not care if trust qualifies as see-thought and just go with the 5 years withdraw
“Irrevocable” or a revocable trust that becomes irrevocable by reason of the grantor’s death. My living trust is the beneficiary of my IRAs but once I die becomes irrovocable. Intervivos living trust transforms into a post-mortem irrevocable trust that gets funded with decedent’s IRA property (if properly designated with custodian and the trust qualifies as a designated beneficiary (4 reqts apply)). My wife is the see-through beneficiary who hopefully with stretch out my IRAs in the event of my demise.
Paul….how is a see-thru accumulation trust taxed if the only asset left is an inherited Roth Ira and the distribution period is over 4 years from DOD of decedent? Are only the yearly "earnings" taxed or is the principal "tax-free" thru that distribution period? Can your trust allow the beneficiaries to use their discretion and can collect the yearly earnings between distributions to avoid the possible 37% trust tax? Or?
Is there a tax benefit to having trust as beneficiary as opposed to naming individual beneficiaries?