When it comes to planning for your estate, you must keep in mind all of your various accounts and their various beneficiary designations. While it’s important not only to ensure that you’ve updated your beneficiary designations, it’s crucial that you’ve elected the most efficient beneficiaries in the first place. For this, it’s not about which heir is best suited economically as a beneficiary. If you are electing a trust as a beneficiary to an IRA or other retirement account, it is simply not the same as electing one of your heirs as a beneficiary. The difference between a trust and an actual person as a beneficiary of an IRA or other retirement account is an important concept to understand.
The confusion between IRA beneficiaries, trust beneficiaries, and IRA trusts by way of IRA beneficiaries is a common confusion; it’s also one that may end up costing your estate and heirs. The Slott Report took up the charge recently and offered a definitive answer worth considering for those hoping to mix their trusts and IRAs.
The question (and article): “How Many Beneficiaries Are There With a Trust?”
The answer? Just one: the trust. Even if there are 20 beneficiaries to the trust, there is just the one beneficiary to the IRA - and that is the trust itself.
The difference comes out in the balance and the math at the end. Naming a trust as beneficiary can seem like or even be an easy way to spread an IRA amongst the heirs you have already chosen to be beneficiaries of the trust. It is not the same thing, however, and that may affect the usefulness of the IRA. After all, IRAs can make for uniquely useful bequests because they can be stretched out over the life of the inheritor; however, when the trust is the beneficiary, the math changes entirely. How? It is the eldest beneficiary that determines the age.
How and when distributions happen is, further, at the discretion of the trustee rather than the would-be IRA owner. Sometimes this multi-tiered approach can work for a family, but more often than not it is not understood before the papers are signed and only dealt with after the fact.
Always consult your attorney when considering the trust, its assets, and any time you might wish to elect the trust as a beneficiary to this account or the other.
Reference: The Slott Report (May 30, 2014) “How Many Beneficiaries Are There With a Trust?”