CA Estate Planning Blog

Thursday, September 11, 2014

Should You Name A Trust As Beneficiary of Your IRA?

Some of us are lucky enough to have an IRA account that we will not have to use during our life.  For these individuals, it might be a concern whether to leave this IRA to beneficiaries outright or in a trust.  There has been an ongoing debate relating to whether it is more beneficial to simply designate a beneficiary or use a trust to receive IRA assets.  After a United States Supreme Court case recently found that an IRA is accessible by creditors in bankruptcy, many are leaning towards the latter option.

IRA accounts do not pass according to a person’s will.  When you open an IRA account, you are asked to fill out a beneficiary designation that specifies who will receive the assets in the event of your death.  If you decide to use a trust to receive these assets, you must create one specifically for that purpose, to be sure that is has all of the necessary terms and manages the assets according to your requirements.  

Using a trust to receive an IRA account after death can be beneficial to your heirs.  They can offer protection from creditors, even in the case that one of your beneficiaries gets divorced.  They also allow you to put certain restrictions on the inheritance to protect it from an irresponsible heir.  In addition, the use of a trust can allow you to leave these assets to an heir that is a minor, a task that cannot be done using a beneficiary designation, and allows you to control the way the inheritance is used when the minor becomes of age.  

But, the use of a trust does have some disadvantages as well.  For instance, a trust allows you to name multiple beneficiaries of IRA assets.  But, by doing this, you might be burdening your other heirs.  If one of the beneficiaries is much older than the rest, the minimum required distribution (the amount your heirs are required to take every month) might be significantly greater than it would be had you only appointed a single beneficiary of a younger age.  Spouses can also be negatively affected by using a trust to receive an IRA.  Spouses can lose the income tax benefit that they would get if the IRA was inherited outright, among other things.

If you want to know whether it is in your heirs’ to create an IRA beneficiary trust, you should speak to a qualified estate planning attorney.  Call Brian Chew at (949)347-5256.


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