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IRA
IRA Beneficiaries: What’s In A Name?
By Dwight Wanken
Registered Principal, Raymond James Financial Services, Inc.
There comes a time when your surviving spouse, children and others will inherit your Individual Retirement Accounts (IRAs), yet you would like to control the distribution of those assets after your death.
Perhaps your heir is not interested in managing the investments, has potential creditor problems, or is simply not capable of “minding the store” because of emotional turmoil, family conflict or disability. Naming a trust as beneficiary of your retirement accounts may be the solution that allows you to relax and enjoy the confidence that comes from knowing your loved ones are provided for exactly as you wish, but it requires planning to work properly.
The first step in your planning is to determine whether naming a trust makes sense for you. The following example may help you answer the question. Meet Mark and Maria. Mark and Maria have three children. Mark also has substantial IRA accounts. Mark handles the family investments, as Maria has never felt comfortable doing so. Mark and Maria both believe the children for personal or financial reasons simply are not capable of “minding the store” after both Mark and Maria have passed away.
Mark can name a trust as a beneficiary of his retirement accounts. This will ensure that the investments are professionally managed and relieve Maria of this responsibility. Naming a trust as beneficiary provides Maria with professional and objective help if the children request money. It also ensures that, following both Mark and Maria’s passing, a capable party will be responsible for managing the store: keeping track of and managing the investments, paying the children’s bills, handling tax matters and attending to every little detail required by the trust.
Once the decision has been made to name a trust, the trust itself must be properly planned. To qualify as a beneficiary, your trust must meet four very specific criteria. If each of these criteria is met, it is a “qualified” trust and the retirement account administrator can “look through” the trust to “see” the trust beneficiaries as the direct beneficiaries of the retirement account.
While any trust may be a retirement account beneficiary, only a qualified trust may take full advantage of the stretch permitted by the required minimum distribution rules. A qualified trust may stretch distributions out over the single life expectancy of the trust beneficiary, or the age of the eldest beneficiary in the case of multiple beneficiaries.
When a qualified trust is the retirement account beneficiary, it receives the retirement account distributions and in turn passes them on to the trust beneficiaries. In most qualified trusts, the trustee is not required to pass on any more than the required minimum distribution, thus the heirs are prevented from rapidly depleting the retirement account. Generally, estate planners use a revocable living trust that becomes irrevocable upon the owner’s death as the retirement account beneficiary. Other types of trust may be used and may be more appropriate in certain situations.
As you might expect, dealing with trusts requires careful planning. All in all, naming a trust as a retirement account beneficiary can be an effective financial and estate planning strategy if permitted by your IRA document. But like all other strategies, it must be carefully considered and implemented. It is important to seek advice about the options available under your IRA document from your financial advisor or estate-planning attorney before naming a trust as your retirement account beneficiary.
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