Naming a Trust as Your IRA Beneficiary

Q: If I name my trust as my IRA beneficiary, can each of my trust beneficiaries stretch RMDs?

A: Yes and no. Yes, they can stretch RMDs but the stretch is severely limited, especially if you have trust beneficiaries with a huge age gap. Assuming the trust qualifies as “see-through,” at best, RMDs may be calculated based on the oldest trust beneficiary’s life expectancy.

Individual beneficiaries of a qualified trust cannot stretch RMDs over their individual life expectancies. Even though a “stretch” may be available, a multi-generational distribution opportunity is eliminated.

Q: Will the IRA distributions be taxed at trust rates or individual income tax rates?

A: That depends on the trust. Generally, a trust pays income tax on income held inside the trust. When RMDs are required to be paid immediately “through” the trust to individual beneficiaries, individual income tax rates usually apply. Trust taxation can be very complicated and trust terms vary so it’s important to consult with your personal advisors concerning any trust taxation questions you may have.

Q: My wife passed away and our trust is the beneficiary. The IRA custodian said the “5 Year Rule” applies, what does that mean?

A: The “5 Year Rule” means that the entire IRA must be fully distributed no later than December 31st of the fifth year following the year the IRA owner passes away. Basically, there are no RMDs since distributions are optional until the fifth year. Of course, any amount can be distributed anytime as long as the IRA is fully distributed by the 5 year deadline.

Q: I named my trust as my IRA beneficiary last year but I want my kids to have a multi-generational distribution opportunity. I paid a lot of money for my trust and I don’t want to pay more to have it amended, am I stuck?

 
A: No, you are not stuck and you don’t need to have your trust amended because you changed your mind on that issue. In this case, you can simply update your IRA beneficiary designation form by removing the trust as your IRA beneficiary and directly name your individual beneficiaries. A trust can be a great planning tool, especially for non-retirement assets, but always consult with your personal advisers to make sure your trust and your beneficiary designation forms are set up correctly to achieve your goals.