When you opened your Individual Retirement Account (IRA) and selected a beneficiary or beneficiaries, you probably automatically named your spouse and your children. For several reasons, it could be appropriate to reconsider that decision and name a Trust as beneficiary instead. A Trust is a relationship in which one party, known as a grantor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.
Consider the following three situations:
- You wish to provide funds for children from an earlier marriage.
If you remarry you may face the decision of whether to name the current spouse as the primary beneficiary of the IRA or naming your children from a prior marriage. It may be that you want your current spouse to receive all these funds upon your death. However, you may want to ensure that when your spouse dies, any remaining funds in your IRA should pass to your children from the earlier marriage rather than to your spouse’s heirs. One solution to this dilemma is to name a Trust that you have created as the primary beneficiary of the IRA. This Trust provides that the proceeds from your IRA are paid out as you specify to your current spouse, for his or her lifetime. The Trust then provides that your children from the previous marriage receive the remainder of the IRA at your spouse’s passing. In this way, you can ensure that your spouse enjoys the benefit of the IRA but upon his or her death, your children from your earlier marriage can receive what is left.
- You wish to protect your beneficiaries from themselves or creditors.
You may have adult children who have personal issues that make them impulsive with money or marital problems that may result in a divorce and a division of assets. You could create a trust and make it the beneficiary of your IRA with instructions to pay out sums for your child at specific intervals. The key advantage of this Trust is that the IRA assets, along with any other assets held in the Trust, are protected from creditors of the beneficiary and are not treated as marital assets of the beneficiary. In this way, you are protecting your child from a number of potential financial risks.
- You wish to ensure that your goals for your beneficiaries are fulfilled.
A third reason for creating a Trust is control. After you die, your beneficiaries can do whatever they want with the proceeds of the IRA, including cashing out the entire account and losing the ability to “stretch” your IRA’s long term tax deferred growth potential. You may not want to tempt your beneficiaries with this “cash-out” scenario and, by creating a Trust and naming it as beneficiary, you determine the exact circumstances under which the money is distributed.
If you are interested in exploring the idea of a Trust to protect the assets of your IRA, please contact Stacey Willits McConnell, Chair, Estate Department, Lamb McErlane PC; firstname.lastname@example.org or (610) 701-4431.
Stacey chairs Lamb McErlane’s Estate Planning and Trusts Department and has been in private practice in the Philadelphia area for more than 20 years representing both individuals and institutions. Her practice focuses on estate planning, administration of trusts and estates, charitable giving, and sophisticated wealth preservation and transfer techniques.