Leaving Roth IRAs to Minors

Those who inherit Roth IRAs are required to withdraw a portion of the funds annually based on their age rather than being able to leave it all in the Roth to grow at a tax-free rate. If a Roth owner plans to leave the account to minor grandchildren, a trust might be prudent.

The main type of trust used in conjunction with Roth IRAs is the “see-through” or “conduit” trust. Yearly distributions are calculated based on each grandchild’s age and go into his or her individual trust. The trustee then distributes the money from the trust as directed. The settlor can also determine at what age the grandchildren should be able to get the distributions outright.

Other facts about these trusts:

• It typically costs a few thousand dollars to set one up
• They also protect the assets against bankruptcy in most states
• They have to be worded precisely in order to meet IRS rules
• A copy of the trust documents must be filed with the IRA custodian by October 31 of the year following the IRA owner’s death for maximum benefits for the grandchildren 

See Kelly Greene, Leaving Your Roth IRA to the Kiddies, WSJ, May 1, 2010.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this to my attention.