Naming a testamentary trust as your IRA beneficiary

Naming a testamentary trust as your IRA beneficiary

Individual Retirement Accounts (IRAs) are currently one of the most widely used financial planning tools among Americans. Like other financial or estate planning options, however, IRAs require the naming of a beneficiary, and a great deal of consideration should be given to that all-important decision.

Typically, IRA beneficiaries are individuals whom the account holder designates to receive the account assets after the his/her passing.  But, there are instances where one might find it useful to avoid that traditional approach, and name a legal entity such as a trust as the beneficiary of their IRA.

A couple of those instances might be when the account holder’s intended beneficiaries have yet to reach the age of majority, or are unable to be trusted to use the account funds wisely.  In the traditional estate planning context, these situations are regularly solved by the creation of a testamentary trust (i.e., a trust created under the Will of an individual).  Interestingly, that solution can also be applied to an IRA.  That is, if an individual’s Will creates a testamentary trust, that trust can potentially be named as the beneficiary under their IRA plan.  If this is done correctly, an individual’s IRA can also become a highly effective estate planning tool.

In order to name a testamentary trust as a beneficiary under your IRA, several formalities must be observed, including but not limited to:

  1. The IRA custodial agreement, or plan document, would need to be checked to see that it will accept the testamentary trust as a beneficiary.
  2. The proper terminology would need to be used on the beneficiary designation form to refer to the testamentary trust when naming it as a beneficiary.

There are several other considerations that should be discussed with your estate planning attorney, financial planner, and/or CPA before naming a testamentary trust as the beneficiary of an IRA.  First, steps need to be taken to ensure that the trust can continue to receive the benefits of income tax deferral, and to do so, the trust itself must meet certain requirements.  Also, the account holder must consider whether to name a single trust or multiple trusts as beneficiaries on their IRA.  Naming a single testamentary trust with multiple beneficiaries of varying ages could have a detrimental impact on the distribution of account funds to the beneficiaries if the trust is not carefully created for the intended purpose.

Naming a testamentary trust as the beneficiary of your IRA can be a useful part of your overall estate plan. As with many estate planning opportunities, however, it is fraught with potential missteps that could have negative tax implications and unintended outcomes. If you think this strategy might be right for you, or would simply like more information, give me a call and we can discuss this and many other options to craft the perfect estate plan for you and your family.

Jarrod B. Casteel is an attorney with the law firm of Butler, Vines and Babb, P.L.L.C. in Knoxville, Tennessee and can be contacted at (865) 637-3531.

*Please remember that advice and counsel regarding your particular legal issues, including the potential impact of the information outlined above, relies on the specific facts and circumstances of your case.  Determining the potential impact of the above information on your situation requires consideration by an attorney.  Any action taken as a result of the above information should be done in close consultation with your attorney and other advisors.