Protecting Your Beneficiaries with an IRA Trust

IRAs and other retirement accounts can be some of the largest assets in an estate, often second only to a home.  If you have an IRA, you can decide who receives your IRA after your death by filling out a beneficiary designation form naming beneficiaries—children, spouse, or any other person—for your IRA. After your death, your IRA can then provide a living for the beneficiaries that you named. Choosing the proper beneficiaries for a retirement account is an important component of an estate plan.

IRAs, however, are unique estate planning tools because your IRA is subject to income tax when withdrawn, even in the hands of your beneficiaries. If you do not plan ahead, your entire IRA may be subject to income taxes over a short period of time, causing your beneficiaries to lose the benefit of income tax deferral that you enjoyed during your life.

With proper planning, you can give your beneficiaries a stretch IRA payout where they can defer taxes over their lifetimes. However, there is a catch. To use a stretch IRA your beneficiaries must receive the IRA outright, meaning they have full control of the IRA, leaving you with no control. Without control, you cannot provide protection for your beneficiaries, restrict how the IRA is used, or guarantee that the IRA will stay in your family.

For many families it can be important to provide beneficiary protection, restrict IRA use, or keep an IRA in the family. If you have minor or irresponsible children who receive your IRA, those children can withdraw your IRA immediately after your death for any purpose, possibly wasting the IRA and creating a large tax bill. Additionally, if you are in a second marriage and have your own children but you want your spouse to receive your IRA, your spouse could take your IRA and leave it to his or her children instead of yours. Using a stretch IRA payment leaves you subject to these problems and without control of the funds after your death.

An IRA Trust is a tool designed to solve these problems—a have your cake and eat it too solution. An IRA trust is a special trust that allows you to retain control over how an IRA is used but also allows a stretch IRA payout instead of immediate taxation. By leaving your IRA in trust, instead of outright, you can decide who receives your IRA and restrict how they use it. By drafting the trust with special provisions, it is treated as an IRA Trust and the stretch payout is allowed.

Some common situations where you should consider using an IRA trust include:

  • If you have minor or young children.
  • If you want to protect your children from bad spending habits.
  • If you have a child in a bad marriage or who has debt.
  • If you are in a second marriage but have your own children. 

Contact our office to learn more about IRA Trusts. Our attorneys are familiar with IRA trusts and can help you decide whether an IRA trust would be a suitable tool for you.