Naming a Trust as Your IRA Beneficiary

Naming a trust as your beneficiary for an IRA is not a good decision for everyone. Noncompliance with required minimum distributions (RMDs) can be costly, and naming a trust can be inflexible for individual beneficiaries, so it is a good idea to make sure that it is the right move for you.

To obtain tax efficiency for RMD rules, there must be a designated beneficiary, one who has a measurable life expectancy. This rules out trusts as they are entities, not individuals. However, there are ways to make a trust a designated beneficiary, following “see-through-trust” requirements. If an IRA leaves distributions to a non-see-through trust, then the trust will receive unfavorable benefits under the “no-designated-beneficiary” rules. In order to receive the RMDs, you must use the life expectancy of the oldest beneficiary. If a trust has a younger beneficiary, naming the trust as a beneficiary of an IRA may prevent that individual from maximizing the “stretch,” which would be afforded had the beneficiary been named as an individual. So, should you name a trust as a beneficiary for an IRA? It depends, so you must consider the complexities and limitations before doing so.

See Rockwell T. Gust IV, Is Naming a Trust as Beneficiary of Your IRA a Good Idea?, Financial Advisor, December 2, 2016.