IRA Inheritance Trusts were approved by the IRS in 2006 in order to address some of the estate planning concerns that arose when setting up other beneficiary trusts to inherit IRA assets. One of the main problems was that, if there was more than one underlying beneficiary of the IRA, the required minimum withdrawals could only be stretched out over the calculated estimated lifetime of the oldest beneficiary. This new type of trust solves that.
Setting Up the Trust
If you have significant IRA funds accumulated and you have multiple beneficiaries, setting up an IRA Inheritance Trust allows you to split the trust into sub-trusts -- one for each beneficiary -- on death. That way, the trustee can control the required minimum payouts and shelter the plans from creditors and other hazards. The plan is a revocable trust. You own the IRA assets as long as you are alive and name the trust as the beneficiary. When you die, the IRA rolls over into the trust tax-free, although your estate may still be subject to estate tax. The trust's beneficiaries are whomever you wish to ultimately inherit your IRA funds.
Splitting Upon Death
Upon your death, the trust becomes irrevocable and splits into sub-trusts for each of your beneficiaries. Each sub-trust holds the beneficiary's inherited portion of the IRA. The trustee calculates the required minimum distributions required to be taken from the IRA based on the beneficiary's age in reference to the IRS table. Each sub-trust can be set up as a conduit trust, in which the distributions flow directly to the beneficiaries, or an accumulation trust, in which the distributions stay inside the trust. The trustee can change each trust once from one type to another based on the needs of the beneficiary.
Benefits of Holding Inherited IRAs in a Trust
When transferring IRAs to minor children or to young adults, a trust protects the IRA from potentially foolish financial decisions. Removing more than the required minimum results in significant taxes and penalties. A trustee can dole out the money in a measured, responsible way to ensure that it continues to grow and that the needs of the beneficiaries will be met in the future. A trust also protects the asset from creditors and divorce proceedings. If your beneficiary's spouse inherited the IRA after your beneficiary dies, it might otherwise end up in the hands of someone in that family, not in your own. A trust keeps the funds safe.
Choosing a Trustee
The rules of an IRA Inherited Trust require that the trustee chosen is not related to the beneficiaries by blood or marriage. It can be a lawyer, CPA or a trusted friend. As these trusts will be open for many years, ensure that the person you choose is willing and able to administer the plans in the long run. The terms you set in the trust before you die will dictate what the trustee can do with the funds, but leaving the trustee detailed instructions of your wishes with regards to distributions to the beneficiaries will facilitate the process.
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