I would like to name two grandchildren as IRA beneficiaries but there
are issues. The first is a 17 year old special needs child for whom a
trust has been set up. Can it leave an IRA to a trust fund?
The second is an eight year old boy. Can an eight old inherit an IRA
directly or is a trust needed?
A trust needs to be properly worded, of course, but it can do exactly
what you wish. On your death the IRA is then administered by the trust
and would make disbursements as you wish. The simplest way is to have it
disburse the RMD (required minimum distribution) each year, or you can
write in instructions for other amounts, say, for certain specific
For the 8 yr old, I'd do it as well. It's not required, but depending on
your state, he'd have unlimited access at 18 or 21, and can blow through
the money that instead should provide a lifetime of income.
Yes. A Trust attorney would know how to properly word it to make sure
that happens. Two key points that come to mind: The trust can not be
funded while you are alive. If you put the IRA in the trust today, it's
deemed a distribution, tax and penalty (if you are under 59-1/2) are
due. Second, if you are wanting to set this up for two people, the
cleanest way to do it is to have two trusts, and on your death, they
each receive half the IRA funds, and take on the distribution based on
the child's age. Third, be sure the amount to be disbursed each year is
at least the RMD. An RMD not withdrawn from the IRA is subject to 50%
penalty. An RMD taken out of the IRA but not distributed to the
beneficiary is subject to taxes at trust rates.
Ideally, you want this as simple as possible to administer.
I stress, if the trust attorney says anything about "funding it now"
(i.e. changing the IRAs title instead of beneficiary), you need to thank
him, and head for the door. That's the litmus test for not understanding
this. Let us know how you do with this, or if you have any questions.
I believe you mean that the trust cannot be funded _from the IRA_
while you are still alive - there's no reason you could not put plain
old cash into that trust (if it has crummey provisions, you could even
do so without being subject to gift taxes).
The IRA certainly could not be put into the trust. I don't even know
of a way to do it even if one tried.
That's a good idea. It's essential that the trusts also have ONLY
individuals as beneficiaries. If by some accident, the trust has both
an individual and, say, a charity as beneficiaries, the IRA inherited
by the trust would have to liquidate (and pay taxes) way faster.
Also a good idea. You do not want to be hit by trust tax rates.
Could you comment on my note about this above - re: funding it with
cash right now shouldn't be an issue. Only funding it by somehow
trying to shove the IRA into it immediately would be a problem.
Frank, btw, this is a nice article worth reading:
And if you've got a special-needs kid involved, make sure that the
attorney you are working with is a specialist on that in particular.
You want to make sure that the trust is set up just right in order to
mesh best with other benefits the child may be entitled to.
The article you cite is great. Frank asked about using a trust for the
IRA distribution, nothing else, I was stressing a point there. Of course
a trust can be funded presently, I'd just keep the trusts for the IRAs
completely separate, and the the non-IRA trusts away from this dialog to
stay on topic.
Thanks for the followup. Perhaps it was just the way I read what
you wrote, but it seemed to suggest that the trust should not be
funded at all and I wanted to make sure that wasn't what you meant
to say. For folks who've already got an ILIT (with only the kids as
the beneficiaries for example) set up, if it matches
the other parameters necessary for maximum benefit in using the trust
as a beneficiary of an IRA, it may make overall administration easier
to have fewer trusts involved. But it's essential to make certain
that the trust does, in fact, conform to the requirements.
No problem. As you suggest, so long as the details are spelled out, the
trustee may have an easier situation with one trust (for each beneficiary).
I was using sledgehammer approach to drive home the fact the if the IRA
is retitled now, or in any way "put into the trust", then Houston, we
have a problem. I've read too many examples of mistakes that resulted in
an IRA being deemed distributed.