Saving for retirement is among the highest priorities for individuals and families living in California and Individual Retirement Accounts (IRAs) is one of the most common forms of individual retirement accounts. Many people directly name individuals as the IRA’s beneficiary, but individuals should also consider the advantages the naming a Trust as the beneficiary and weigh that against the advantages of naming individuals directly.
In order to maximize the growth of IRAs the funds need to stay in the account for the funds to grow. After the holder of the IRA A passes away, the beneficiaries of the IRA must make only withdraw certain amounts in order to maximize the growth of the fund. However, if the IRA names an individual directly as the beneficiary of the account, the beneficiaries will be free to withdraw all the funds at once. Often, beneficiaries do not understand how to maximize the benefit of IRAs and simply cash out the account. Moreover, IRA proceeds may affect public benefits eligibility.
IRA owners can name a trust as the beneficiary of the account to control and protect their loved ones from poor financial decisions. Naming a trust as beneficiary would allow the IRA account holder to control post-death distributions for individuals who may need help with managing the IRA funds. Naming a trust as the beneficiary also insolates the assets from the beneficiary’s creditors. Because the assets are not owned by the beneficiary, but by the trust, the beneficiary’s creditors cannot touch the assets.
IRA trusts are also often used for couples who have children from previous marriages. A policy owner may want his or her spouse to benefit from the IRA income, but after the spouse’s death, the policy holder can direct that the IRA’s go to his or her children and not to his spouse’s children from previous marriages.
The disadvantages of naming a trust as the beneficiary is its complexity. There are specific requirements for a trust to be qualified as a designated beneficiary so that its growth is maximized. If the trust does not qualify, then it is as if there is no named beneficiary and the trust beneficiaries will not be able to stretch post-death required distributions over their life expectancies. Additionally, yearly tax returns would need to be filed.
Individuals with IRAs must then understand not only how their IRAs are structured but then carefully consider whether naming a trust as the beneficiary account offers them any added protections and value.