Demystifying Trusts as an IRA Beneficary

I have heard many myths about IRA beneficiaries, such as: Trusts can not be beneficiaries of an IRA, or if the Trust is the beneficiary of an IRA it destroy the IRA and it will not be able to be stretched into an inherited IRA for the beneficiaries of the trust.

Usually these are not true if the trust is done properly.

Your revocable living trust or irrevocable trust can be named as a beneficiary of your IRA and it does not trigger the 5 year withdrawal provision if your trust meets the requirements of Treasury Regulation 1.401(a)(9)-4a and is a "look-throught" or "see-through" trust. (explained in detail below) e.g. - It passes through to your named beneficiaries.

Many times people will say that IRA's avoid Probate and therefore the beneficiary does not need to be a Trust. Yes in most cases that may be true; However, naming individual beneficiaries on your IRA(instead of your trust) does not necessarily mean probate would be avoided because the named contingent beneficiaries could be gone leaving no beneficiaries and therefore it would have to be probated through the IRA owners Estate.

Many times the he main reasons for having the trust as beneficiary of an IRA is 1) so all assets are controlled by the trust; 2) so the IRA will be distributed pursuant to your trust and 3) so the IRA can be managed if necessary for a minor or disabled beneficiary if such a case was applicable. The Trustee could see to it that the IRA is stretched for the beneficiary or if necessary cashed in and held in trust for the benefit of the beneficiary depending on what is needed.

A trust can absolutely become eligible for designated beneficiary treatment, qualifying as a “see-through” trust where the post-death RMDs are calculated based on the life expectancy of the oldest of the trust’s underlying beneficiaries. In order to qualify as a designated beneficiary, though, the trust must meet four very specific requirements (which yours does), as stipulated in Treasury Regulation 1.401(a)(9)-4, Q&A-5:

1) The trust must be a valid trust under state law. Generally this just means the trust is not a handwritten trust (not permitted in many/most states), has been properly signed and executed as a trust (witnessed, notarized, etc., as required under state law), and does not contain any provisions that would outright invalidate the trust under state law. For virtually any trust drafted by a competent attorney that was legally signed and executed in the first place, this requirement should be a non-issue.

2) The trust must be irrevocable, or by its terms become irrevocable upon the death of the original IRA owner. A revocable living trust that becomes irrevocable upon the death of the owner qualifies under this provision, as would any irrevocable trust that was simply drafted to be irrevocable from the moment it was executed.

3) The trust’s underlying beneficiaries must [all] be identifiable as being eligible to be designated beneficiaries themselves. Not surprisingly, the Treasury Regulations require that if distributions are going to be stretched over the life expectancy of trust beneficiaries, that the trust beneficiaries must be identifiable in the first place, which generally means they should either be identified by name, or identified as members of a “class” of beneficiaries that could be identifiable when the time comes (e.g., “my children” or “my grandchildren” "my issue", etc.) and they must be individual, living, breathing human beings as beneficiaries; if a charity or some other non-living entity is a trust beneficiary, then the trust will not be able to do a stretch over the life expectancy of the underlying beneficiaries because not all the underlying beneficiaries as designated beneficiaries with a life expectancy in the first place!

4) A copy of “trust documentation” must be provided to the IRA custodian by October 31st of the year following the year of the IRA owner’s death (Your Successor Trustee will do this).

Under supporting Treasury Regulation 1.401(a)(9), Q&A-6, the “documentation” requirement stipulates that the IRA custodian must be provided with either a final list of all trust beneficiaries as of the September-30th-of-year-after-death beneficiary determination date (including contingent and remainder beneficiaries and the conditions under which they would be entitled to payments) along with a certification by the trustee that all of the requirements for stretch distribution are met under the trust, or the trustee can simply provide a copy of the actual (irrevocable) trust document itself to the IRA company.

Daniel H. Alexander
www.dalexander.com

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