By Sarah Brenner, JD
You may ask if you should leave your IRA to a trust. This can be a complicated question. Trusts can be complex and retirement accounts are not like other assets.
How a Trust Beneficiary Can Get the Stretch
If you are thinking a trust is the right beneficiary for your IRA, you will want to be familiar with the requirements for trust a to be a qualified “see-through” trust. Meeting these requirements is the only way the valuable “stretch” advantage can be used by trust beneficiaries. The stretch is the ability of the named beneficiary to spread (or stretch) required post-death distributions from an IRA over the beneficiary’s life expectancy using the IRS Single Life Expectancy Table.
“See-Through” Trust Requirements
To qualify as what the IRS refers to as a “see-through” trust for IRA distribution purposes, the trust must meet the following four requirements outlined in the regulations:
1. The trust is valid under state law or would be but for the fact that there is no corpus.
2. The trust is irrevocable, or the trust contains language to the effect it becomes irrevocable upon the death of the employee or IRA owner.
3. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s or IRA owner’s benefit are identifiable.
4. The required trust documentation has been provided by the trustee of the trust to the IRA custodian no later than October 31st of the year following the year of the IRA owner’s death.
If trust qualifies as a see-through trust, the trust’s beneficiary is treated as if he or she were named directly. This will allow the inherited IRA to be stretched over that person’s life expectancy.
What if the trust has more than one beneficiary? Well, if there are multiple beneficiaries of the trust, and the trust was named as the IRA beneficiary, all the trust beneficiaries must use the life expectancy of the oldest beneficiary to calculate post-death payments. They may not each use their own life expectancies.
Also, watch out for nonliving beneficiaries. If any one of the trust’s beneficiaries is not a person (for example an estate), then then the IRA does not have a designated beneficiary and the stretch will be lost.
Getting it Right
Not everyone will benefit from naming a trust as beneficiary of their IRA. Naming a trust adds a level of complexity and expense that you just may not need. However, if you are looking for control of your retirement funds after your death, a trust can be a good strategy. If the qualifications for a see-through trust are met, your trust beneficiaries can still take advantage of the stretch IRA. This is a complicated area with little room for error. If you want to be sure that you get it right and that your trust is a ‘see-through” trust, your best bet is to consult an advisor who specializes in this area.