When setting up an individual retirement account (IRA), it is essential to have robust estate plans in place, as IRAs are not passed down to one’s family through a will. The IRA account holder must designate beneficiaries when setting up the IRA; otherwise, the IRA could be subject to interstate laws, which could make it difficult for loved ones to gain access to the funds. Setting up an IRA trust can be a way of ensuring that one’s beneficiaries are able to use any remaining retirement funds as intended. Get help setting up your IRA and IRA trust when you contact a dedicated estate planning attorney at Von Rock Law. You can schedule your confidential consultation today by calling our office at (866) 720-0195 or filling out our secured contact form.
Why Set Up an IRA Trust?
Setting up an IRA trust can sometimes be in the best interests of both retirees and their intended beneficiaries. If you hope to ensure the assets contained within your IRA are spent as you intended, it may be helpful to designate a trust as your IRA beneficiary.
IRA trusts can also be known as IRA inheritors trusts, IRA stretch trusts, or IRA living trusts. All of these trusts fall under the Internal Revenue Service (IRS) classification for non-spousal beneficiaries and are subject to the accompanying required minimum distribution (RMD) rules. While RMD may impose some restrictions on how the trust is structured and used, IRA trusts can still provide substantial benefits for non-spousal beneficiaries. Some of the most notable advantages of setting up IRA trusts include the following:
- The opportunity to protect beneficiaries from creditors
- The opportunity to protect heirs from their own poor spending habits
- The chance to reduce potential tax implications for both grantor and beneficiaries
- The opportunity to name a minor as the trust’s beneficiary while protecting their best interests
Protect Your Beneficiaries
One of the most important reasons to set up an IRA trust is to protect your assets from creditors while you are still living. Once you pass away, if the contents of your IRA are passed directly to your beneficiaries, these assets are no longer protected from lawsuits, creditors, and potential divorce. Setting up an IRA trust can help to shield those assets and preserve them for beneficiaries to use as intended.
If you have been divorced and have since remarried and would like for your IRA assets to be passed on to your surviving spouse and then distributed to your children after your surviving spouse passes away, having an IRA trust can protect both your present spouse’s interests and your children’s inheritance.
Protect Your Beneficiaries From Themselves
Sometimes grantors may be worried about how their beneficiaries will spend inherited assets once they receive their inheritance. By setting up an IRA trust, a grantor can take steps to protect their beneficiaries from the consequences of faulty money management skills or poor spending habits. When the assets are not passed down to beneficiaries directly, inheritors do not have the opportunity to spend the wealth left to them quickly.
When an individual sets up an IRA trust, it is possible to include specific restrictions that determine how the assets can be spent, when money will be distributed, and at what age the trust’s beneficiaries can access designated assets. A grantor may consider setting restrictions allowing beneficiaries to use the assets to purchase homes and cover healthcare expenses or choose to withhold beneficiaries’ access to funds until they graduate from college.
Reduce Tax Implications
One of the most persuasive benefits of setting up an IRA trust is that such trusts can sometimes reduce tax liability. The IRS explains that setting up a traditional IRA means that you are currently benefiting from tax-deferred or tax-free growth depending on the type of IRA you set up. After your death, however, if your beneficiaries receive IRA contents directly, they can find themselves facing substantial tax implications for the year in which those funds are withdrawn.
Setting up an IRA trust helps to ensure that the trust’s assets are only withdrawn at specified periods, thereby protecting beneficiaries from paying taxes on the total amount of the IRA in a single tax year.
Name a Minor as Your IRA Beneficiary
If an individual is hoping to name a minor child as the beneficiary of their IRA, setting up an IRA trust is important. Without a trust, the individual would need to designate a conservator to manage the IRA until the minor child reaches 18 years of age. In this scenario, once the minor reaches 18, they will have access to all the funds within the IRA immediately, opening the beneficiary to massive tax implications just as they enter their majority. Utilizing a trust enables a concerned grantor to hire a management company or appoint a trustee to handle the IRA trust terms and distributions, potentially smoothing the beneficiary’s transition into adulthood.
If you are wondering whether setting up an IRA trust is the right option to protect your loved ones’ interests after your death, consider reaching out to discuss your concerns with an estate planning lawyer at Von Rock Law.
Disadvantages of IRA Trusts
Although there are many advantages of IRA trusts, there are also several disadvantages an individual should be aware of before deciding how to proceed with comprehensive estate plans. Some of the most notable disadvantages include the following:
- IRA trusts may be subject to accelerated withdrawal requirements, usually within five years of your death.
- In some instances, IRA assets must be withdrawn within ten years for IRS pass-through trust rules to apply.
- The size of the IRA trust could be considered a burden to beneficiaries, as is often the case with spousal inheritance provisions.
- Trusts can create additional tax burdens for beneficiaries and often generate more paperwork.
There may be several disadvantages of IRA trusts, but in many cases the possibilities for reducing tax implications, setting distribution limits, and avoiding probate make establishing an IRA trust well worth the effort. Working with a knowledgeable and experienced estate planning attorney to evaluate all your options and clarify your financial priorities can help you to set up your retirement savings accounts and your beneficiaries up for success from the start.
Is an IRA Trust the Right Fit for You? Call Von Rock Law to Find Out
The benefits of an IRA trust can be significant, but that does not necessarily mean they are the best option for every person and every estate plan. Consider contacting an experienced estate planning attorney at Von Rock Law to discuss your options further. Schedule your initial consultation today when you fill out our confidential contact form or call our office at (866) 720-0195.
