By Andy Ives, CFP®, AIF®
Yes, trusts can play an instrumental role in estate planning. Yes, special needs trusts are invaluable to those with disabled or chronically ill family members. Trusts are essential for minors and for those who may struggle with managing money. Trusts also allow for post-death control of assets. But they are not for everyone, nor are they a panacea when it comes to estate planning…especially with IRAs.
I continue to pound my head on the desk every time I encounter a trust unnecessarily named as an IRA beneficiary. Why did the IRA account owner name the trust? Bad advice? Was he simply trying to keep up with the Jones’ who bragged about their trust? Did he read someplace that all trusts are great? Was he intentionally trying to make things difficult for his IRA beneficiaries? Sadly, “making things difficult” is oftentimes the unintended result.
Assuming we are not talking about minors or those with special needs, etc., and assuming the original IRA owner is not looking to control post-death distributions, items to consider when pondering a trust as your IRA beneficiary include:
There is no tax benefit that can be gained with a trust that cannot be earned by naming a person directly as IRA beneficiary. In fact, a poorly designed trust or mismanagement of the trust assets could result in an even higher tax bill, not to mention the costs to create the trust in the first place. Compare trust legal fees to how much it costs to simply name a specific person on your IRA beneficiary form. (Hint: The answer is zero dollars for the latter.)
If your goals are to streamline the process and ease the trouble of claiming the IRA by your beneficiaries, then do not name a trust. If your beneficiaries are healthy, mature adults, then just name them directly. That way they can easily establish an inherited IRA and do with it as they please. If you name a trust, the custodian could throw a monkey wrench into the inherited IRA plans. While we have seen IRS guidance allowing trust beneficiaries to establish inherited IRAs when the trust was named as the IRA beneficiary, the custodian still needs to play ball. In addition, there have been multiple occasions where a decedent merely wanted to pass his IRA to his surviving spouse, no strings attached, but inadvertently attached a rope by naming a trust as IRA beneficiary. Surviving spouses have paid thousands of dollars for IRS private letter rulings, all to obtain permission to bypass the trust and complete a basic spousal rollover. These unnecessary trusts, as IRA beneficiary, were all a titanic waste of time and money.
Trust administration requirements are daunting. If a family member with little to no trust experience is named trustee, then expect problems. I have over two decades in the financial services industry, and I want nothing to do with being trustee of a trust. No thanks. Leave that to the corporate trustee – they are the professionals. Which of course means there will be additional steps and fees involved vs. if you had just named the intended beneficiary directly.
I may get some heat from those who think a trust as IRA beneficiary is the right solution every time, but experience tells me otherwise. Desk bruises on my forehead prove the struggle. Please, for my health, do not name a trust as your IRA beneficiary unless there are specific, sensible reasons to do so, and you have obtained experienced, unbiased, professional guidance.
Yes, trusts can play an instrumental role in estate planning. Yes, special needs trusts are invaluable to those with disabled or chronically ill family members. Trusts are essential for minors and for those who may struggle with managing money. Trusts also allow for post-death control of assets.