What happens if I name a trust as beneficiary of my IRA?

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What are the consequences of making my trust the beneficiary of my traditional IRA?


There are a few common reasons for naming a trust as beneficiary of an IRA. One is to maintain control -- to ensure that the assets of the IRA are distributed according to the same plan that is set up in your trust. Such control may be important if, for example, the beneficiary is a child or has special needs. Another reason is to fund a bypass trust -- that is, to make sure that you can make optimum use of your estate tax exemption amount.

However, there are plenty of disadvantages to naming a trust as beneficiary. For one thing, you will be funding the trust with pretax money. So, say you direct $500,000 of IRA money into the trust. The trust will not actually be funded with $500,000. It will be $500,000 minus the taxes owed on the IRA when the money is distributed. By contrast, if you put $500,000 of cash in the trust, the trust is funded with the full $500,000, because the cash is after-tax money.

If you are married, another risk in naming a trust as beneficiary is that your spouse cannot automatically roll over your IRA into an IRA in his or her own name when you die. For a spouse to be able to do that, the spouse -- not the trust -- must be the beneficiary. Being able to roll over a deceased spouse's IRA is a huge advantage and one you should think twice about giving up.

It is possible to name a trust and still manage to roll over some or all of the IRA, but it will take a good lawyer to structure the trust and beneficiary designation properly, and even then, there are no guarantees. Some taxpayers have made it work, others have not.

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