AN IRA TRUST AS BENEFICIARY OF RETIREMENT ASSETS
By: Seymour Goldberg, CPA, MBA, JD
Updated information is available on http://www.atprime.com
One of the most interesting new IRA developments is to set up an IRA Trust payable to a child or grandchild. It is divorce proof, creditor proof and it provides a steady stream of income to the intended child or grandchild. The IRA Trust is generally estate tax proof and provides the child with an indirect retirement benefit.
If the trust is payable to the grandchild, the trust can possibly last for 70 years. The IRA Trust is an excellent way to provide for a college fund or other assets for the grandchild when needed. The IRA Trust assures that the grandparent will always be remembered by the grandchild.
Here are some of the advantages, and disadvantages of establishing an IRA Trust.
ADVANTAGES OF THE TRUST AS A BENEFICIARY
1. If the IRA death benefits are payable directly to a designated beneficiary, then the death benefits may be accelerated at anytime by the designated beneficiary.
2. If the IRA death benefits are significant and payable to the trust, then a knowledgeable trustee may take advantage of the extended payout period if the IRS trust documentation requirements are timely satisfied with the IRA institution. The IRS trust documentation requirements must be satisfied by October 31st of the calendar year following the IRA owner’s year of death.3. A mature trustee will control the investments while the assets are in the IRA.
4. If IRA death benefits are payable to a trust they may be protected from the creditors othedesignated beneficiary under state law or in a divorce proceeding.
5. If IRA death benefits are payable to a trust they may be protected if the designated beneficiary declares bankruptcy.
6. If IRA death benefits are payable to a trust for the benefit of a minor it avoids the jurisdiction of the probate court or a similar court that has jurisdiction over the minor's assets.
7. If IRA death benefits are payable directly to minor, then the probate court or a similar court is involved. The probate court or a similar court may not go along with an extended payout period of IRA distributions.
8. The trustee should be required to reimburse the estate of the deceased IRA owner for the estate tax liability attributable to the IRA if necessary. This protects the executor of the estate and avoids problems in obtaining reimbursement from a designated beneficiary who may have otherwise dissipated the IRA assets.
9. Multiple IRAs may be established and each may have a different designated beneficiary. This permits income splitting. Adult children may be the designated beneficiary of an IRA with or without an intervening trust.
10. A trust for adult child may be necessary if the adult child cannot handle money or would not otherwise reimburse the executor of the estate for the estate tax liability attributable to the IRA on a voluntary basis.
11. The life expectancy of child or grandchild will generally result in a greater deferral of income then if the surviving spouse was the designated beneficiary of the IRA.
12. The children or grandchildren benefit from growth of IRA instead of the surviving spouse. This should save a considerable amount of estate taxes on the subsequent death of the spouse.
13. The trust may be used as an exemption trust for estate tax purposes.
DISADVANTAGES OF THE TRUST AS A BENEFICIARY
1. The legal costs of establishing the trust.
2. The annual costs of preparing trust income tax returns after the death of the IRA owner.
3. The cost of informal or formal accounting of the trust transactions.
4. The potential liability of the trustee if he/she or it does not have a prudent investment policy.
5. The surviving spouse may feel alienated if he/she does not receive the IRA death benefits.Thesurviving spouse should be consulted in advance before selecting a trust as a beneficiary. Generally the surviving spouse will agree if other liquid assets are available for his/her benefit.