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Who Benefits from an IRA Inheritance Trust?

October 12, 2018 Estate Planning

Trying to unravel all the ins and outs of the estate planning process can make your head spin. Most people associate wills with estate planning, but there are so many more legal tools that can be put in place to help plan for the future health and financial well being of you and your family. An IRA inheritance trust is one such valuable legal tool that may be beneficial to you and your loved ones. Find out of an IRA inheritance trust should become part of your estate plan.

The majority of the time, the money held in an IRA account will be distributed to the person you list on the beneficiary designation form. This is one of the forms you will fill out when you open or amend an IRA account. Not many people are actually aware that you do not necessarily have to name an individual as the account beneficiary. You may list a trust as the beneficiary. This trust is what is referred to as an IRA inheritance trust.

When considering whether or not to utilize an IRA inheritance trust, you really need to think about who would benefit from establishing such a trust. This means considering who would be the designated beneficiary of the IRA proceeds. An IRA inheritance trust can be very beneficial if you are considering designating an IRA beneficiary who may:

  • File for bankruptcy
  • File for divorce (where their former spouse would become a creditor)
  • or Have creditors

Basically, if you are considering leaving the money in your IRA to a loved one who has or may have financial or creditor issues, an IRA inheritance trust is a very good option to consider. The trust will protect the IRA proceeds from creditors so that your beneficiary can continue to enjoy the benefits of the savings you have left them.

An IRA inheritance trust is also a good idea if the intended beneficiary may have problems managing money. You may create a trust with terms controlling the cash flow to the designated beneficiary. You may also want to limit access to the money held in the IRA until the intended beneficiary is 18 years old. A trust will allow you to place such limits on access to the funds.

When considering who may benefit from establishing an IRA inheritance trust, it is also a good idea to consider who may fall at a disadvantage if you employed such an estate planning tool. This is particularly relevant if you are planning to designate your spouse as your IRA beneficiary. The tax implications for leaving your spouse the proceeds of your IRA in a trust as opposed to outright may dissuade you from employing the IRA inheritance trust.

First, leaving your IRA to your spouse outright provides you with income tax benefits. Additionally, when IRA proceeds are directly given to your spouse, he or she can roll over the IRA into his or her own IRA and choose to defer distributions until reaching age 70.5. If your spouse chooses to roll over your IRA, it can reduce the annual required minimum distributions. This means more money can be left in the IRA to enjoy income tax free compound interest.

Like many estate planning tools, the IRA inheritance trust had the potential to be very beneficial when used in the right circumstances. Consult with a knowledgeable estate planning professional to make sure this type of trust is right for you.