The advantages of using trusts in general include spendthrift protection, creditor and predator protection, beneficiary divorce protection, special needs planning, consistent investment management, estate planning, and exercising control over the trust assets after the death of the trust maker.
To be a qualified trust, and thus qualify as a designated beneficiary of an IRA or retirement plan account, an IRA trust must satisfy some rules but in general as long as the beneficiaries are individuals and identifiable, the trust requirements are met. So, for example, generally, a typical Revocable Living Trust which names beneficiaries to inherit after death would satisfy these conditions.
Types of IRA Trusts: There a two types of IRA trusts but we generally prefer the Accumulation Trust.
Conduit Trust
This is a trust in which all distributions from the IRA are required to be immediately distributed to the trust’s beneficiary(ies). Because all distributions, including RMDs, must be immediately distributed to the beneficiary(ies), those distributions are not asset protected, as they would be if they could stay in the trust. That’s why we prefer the Accumulation Trust.
Accumulation Trust
An accumulation trust is one in which distributions from the inherited IRA may be kept within the trust rather than being distributed to the beneficiary(ies). That way, the trust assets have more protection against creditors and predators. This also more easily allows the beneficiary(ies) SSI/Medicaid eligibility to be preserved.
The IRS allows a one-time “toggle” from conduit to accumulation trust. Having such a provision could be important if there is a change in circumstances of a beneficiary (disability, drug problems, etc.) between the time the owner sets up the trust and September 1st of the year following the owner’s death.
Beneficiary Designations—Separate Shares
If an IRA is payable to an IRA trust rather than the separate beneficiaries’ shares of the trust, the trust’s RMD (Required Minimum Distributions) will be determined by the life expectancy of the oldest trust beneficiary (problematic if one beneficiary is age 60 and another beneficiary is age 2). Therefore, we use multiple sub-trusts so, the IRA share of each sub-trust will be paid over the life expectancy of the oldest beneficiary of that sub-trust.
Conclusion
Naming a separate IRA trust as designated IRA or retirement plan beneficiary is preferable to naming beneficiaries outright. It ensures that the client’s goals are carried out, including that the client’s beneficiaries will use the IRA stretch out potential. It provides asset protection against predators, the beneficiaries’ creditors and loss upon divorce. It can provide bloodline protection, preventing unintentional beneficiaries and disinheriting of descendants. It provides for beneficiaries who have or later develop special needs without jeopardizing their valuable government benefits. And it can even keep the IRA assets under the client’s current advisors management.
4 of 4: IRA Trusts Blogs/emails published on July 24, 26, 31 and Aug 2.
These informative Blogs can also be found here: https://florida-elderlaw.com/blog
Interested in a Seminar on IRA Trusts – Email me at alice@florida-elderlaw.com
Call our South Florida office at 954-726-6602 for additional information about IRA Trusts, Estate Planning and any Long term care needs.
