How to Name a Trust as Beneficiary of an IRA

Naming a trust as the beneficiary of your individual retirement account (IRA) is not terribly difficult – once you’ve established your trust, you simply list it as the beneficiary in the paperwork or online portal for your IRA. That said, it is a big decision, so you’ll want to make sure you know everything about what listing a trust as the beneficiary of your IRA actually means before you do it. The strategy gives you maximum control over the distribution of your assets after you pass away, but it requires some careful planning.

For help with your IRA or any other financial planning questions, consider working with a financial advisor.

How to Name a Trust as an IRA Beneficiary

Naming a trust as the beneficiary of an IRA requires careful planning to comply with IRS rules and avoid unintended tax consequences. The first step is to establish the trust and determine whether it will be a revocable or irrevocable trust. A revocable trust offers flexibility during the account holder’s lifetime, while an irrevocable trust provides structured control over IRA distributions after death.

To qualify for favorable tax treatment, the trust must meet IRS requirements as a “see-through” or “look-through” trust. This means it must be valid under state law, irrevocable upon the IRA owner’s death, have identifiable beneficiaries, and provide trust documentation to the IRA custodian by October 31 of the year following the owner’s death. Failing to meet these criteria can result in accelerated taxation.

Once the trust is properly structured, the IRA owner must complete the beneficiary designation form with the account provider, listing the trust as the beneficiary. It is advisable to consult an estate planning attorney to draft the trust language carefully, ensuring that required minimum distributions (RMDs) are taken according to the appropriate beneficiary’s life expectancy. Proper execution can preserve tax advantages while ensuring that IRA assets are distributed according to the owner’s wishes.

Reasons to Name a Trust as an IRA Beneficiary

Naming a trust as the beneficiary of your IRA gives you much more control over the funds. Trusts allow for written instructions on how and when the money should be paid out.

For non-spouse beneficiaries: Naming a trust as an IRA beneficiary can be useful when leaving assets to someone other than a spouse, such as a child, grandchild or another family member.
Tax benefits with control: It allows the IRA owner to retain tax advantages while maintaining control over how funds are distributed.
Oversight for certain beneficiaries: A trust can provide oversight for beneficiaries who may need financial guidance, such as minor children, frivolous spenders, or disabled individuals.
Protection in financial hardships: This approach can protect assets if the beneficiary is dealing with debt, a marital dispute, divorce, or other financial difficulties.
Shielding assets from creditors: Funds held in a trust are shielded from creditors, adding an extra layer of protection.

Naming a trust as a beneficiary is generally not ideal for a spouse, as surviving spouses can roll over an inherited IRA into their own tax-free. So if this is the case, you can save yourself the headache, and simply designate your spouse as your IRA beneficiary.

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Requirements to Name a Trust as an IRA Beneficiary

There are several requirements to designate a trust as the beneficiary of your IRA:

It must be a valid trust under state law.
The trust must be irrevocable (or will become so upon your death).
The trust’s beneficiaries must be individuals. So you can’t, for instance, designate a charity as the recipient of your IRA via the trust.
The trust’s trustee must provide a trust document or certified list of beneficiaries to the IRA’s custodian or trustee by Oct. 31 the year following your death.

Naming a Trust as an IRA Beneficiary: Potential Pitfalls

A couple discuss how to name a trust as beneficiary of an IRA.

There are a few drawbacks to using this tactic, such as the cost of structuring and maintaining a trust, as well as the complexities involved. Designating a trust as the beneficiary of your IRA is much more complicated than naming a beneficiary of your IRA. This complexity increases the risk of errors.

Additionally, you will lose the ability for a spouse to roll over the IRA into their own, tax-free – which in turn negates some of the tax benefits. If you didn’t designate a trust as the beneficiary and the IRA funds simply rolled over, the tax-advantaged account would grow at a much faster rate.

Another potential drawback is that, for smaller IRAs, the cost of setting up and maintaining a trust may significantly reduce the amount left for heirs.

You’ll also want to keep in mind that if you name several recipients in the trust, the required disbursements will be calculated based on the oldest beneficiary’s age. (Remember, you’re required to begin receiving disbursements from a traditional IRA at age 73 or 75 for people born in 1960 or later.)

It’s also worth noting that just because a trust is named as the beneficiary of an IRA, that doesn’t mean the funds are moved into the trust. In fact, they shouldn’t be. Rather, they stay in the IRA to take advantage of the account’s tax benefits until distribution of the funds begins.

To set up a trust as the beneficiary of your IRA, you’ll need to meet with an estate planning attorney with experience in inherited IRAs. You also may consider meeting with a specialized tax advisor.

Bottom Line

Designating a trust as the beneficiary of your IRA is a viable estate planning option in certain circumstances, such as for those who wish to leave their IRAs to individuals other than their spouse, or those wishing to leave assets to a minor child or disabled heir. It’s a complicated process, so work with a qualified professional to make sure it’s done correctly. Those who want their IRAs to go to their spouse should simply name that individual as their IRA beneficiary. In this case, the spousal rollover benefit far outweighs the control that a trust as a beneficiary affords you.

Estate Planning Tips

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