OVER 20 YEARS OF EXPERIENCE SERVING SAN JOSE CONTACT US TODAY

PITFALLS TO AVOID WHEN NAMING A TRUST AS AN IRA BENEFICIARY

One thing that has big impacts on what happens with an IRA after a person dies is who the person named as the IRA’s beneficiary. There are many options people have when it comes to who to designate as beneficiary. For one, they could name their desired heirs directly.

Another option that some go with is to instead name a trust as beneficiary. The trust would then distribute proceeds from the IRA to their desired heirs. A person might opt to go this route is if he or she wants there to be more control over the distribution of the IRA proceeds.

Now, there are some costly mistakes to avoid when designating a trust as an IRA beneficiary. These include:

The trust being poorly designed: Having a trust with vague terms or terms ill-suited to one’s goals could result in the trust not having its desired effect.
Failing to list the trust as beneficiary: A trust designed to be the beneficiary of an IRA, no matter how well-constructed, won’t be able to achieve its purposes if a person forgets to change the IRA’s beneficiary designations to list the trust as beneficiary.
The trust not being a valid beneficiary: There are various rules that have to be met for a trust to be considered a valid beneficiary for an IRA. Due to IRS rules, the trust generally has to: be valid under state law, be irrevocable (or irrevocable upon death) and have identifiable beneficiaries. Also, a copy of the trust has to be given, in a timely manner, to the retirement plan administrator or IRA custodian after a person’s death. If a trust is not a valid beneficiary, it can trigger unintended IRA distribution and tax consequences.
Not paying attention to tax issues: It is important for individuals planning to name a trust as an IRA beneficiary to be aware of what tax rates apply to trusts. This could help with avoiding inadvertently creating situations in which large amounts of IRA proceeds could be lost to taxes.

As this illustrates, naming a trust as a beneficiary is a complicated process that has a lot of rules and impactful issues connected to it. So, when planning to use this estate planning strategy, individuals may find it very helpful to seek out legal guidance on avoiding pitfalls.