Should I Name A Trust As My IRA Beneficiary?
Should I Name A Trust As My IRA Beneficiary?
Before naming a trust as the beneficiary of an IRA or other retirement account, consider the pros, cons, and complexities of doing so.
Trusts have many potential benefits, including:
- Greater control over how heirs use their inherited wealth;
- Greater control over who benefits from your assets following the divorce of an heir;
- Greater protection of assets from creditors of your heirs;
- Potential to avoid costs and delays associated with probate court and
- Potentially greater privacy around how much wealth you have, and who will benefit from it.
However, trusts have potential costs and downsides.
- Time to establish, maintain, supervise, revise;
- Potentially less favorable tax rates;
- Attorney fees;
- Trustee fees;
- Accountant fees; and
- Potentially less favorable "required minimum distribution" rules for inherited retirement accounts.
As you can see, there are significant pros and cons to trust-based planning. Therefore, one should think carefully about whether – and how – to name a trust as beneficiary of a retirement account.
Below are some observations on typical retirement plan beneficiaries and when it might make sense to name them outright or via a trust.
- Spouse: Most people name their spouse as the outright primary beneficiary of their retirement account – without using a trust. That's because most people want their spouse to have simplicity and total, unrestricted access to their retirement plan upon their death. However, if you have concerns about the retirement plan assets being "lost" one way or another – to creditors of your surviving spouse, or diverted out of your family line due to remarriage, or due to mismanagement or declining capacity of your spouse – then perhaps naming a trust makes sense and is worth the cost and effort.
- Children: If leaving a large sum of money to minor or young adult children, it may be a good idea to name a trust as beneficiary despite the costs and complexities. A trust can provide finer control over how children can benefit from your wealth, and that control can extend past the age of 21. For mature adult children, consider leaving assets outright (not through trust) unless you have concerns about potential future divorce, creditors, and/or mismanagement.
- Charity: If you have charitable estate goals, pre-tax retirement accounts are an ideal asset to donate to charity. Usually, you should avoid involving a trust as leaving retirement assets to charity via trust can potentially disrupt tax benefits for other heirs. Given the choice, always leave tax-deferred assets to charity rather than after-tax (Roth) assets or regular brokerage accounts. A Roth IRA should be the absolute last resort choice for charitable gifts.
The Bottom Line
Trusts can provide additional control over your assets after death, but that control comes with a cost and some legal complexities. Consult with your tax and legal professionals about your situation to determine whether a trust is the best vehicle for sharing your wealth with family, friends, or charities. If you would like a fiduciary review of your financial and estate plan, click here or call 812-333-4726 to schedule an introductory call. For more than two decades, the experienced advisors at Hurlow Wealth Management Group have helped clients navigate the complex estate planning and asset transfer process
