We recently had some discussions with a Madison family that was trying to make the most of their father’s IRA and had questions about naming the beneficiary of an IRA. The family wanted to make sure that after the father died, the IRA would benefit one of the children, and then after that child died, the family wanted the IRA to be shared among the other children.
The family kept asking: “Should we name the child as the beneficiary, or should we name a trust (for the benefit of the child) as the beneficiary.
One of the children was married to an accountant. His suggestion (whether it has merit or not is debatable) was, “Don’t name a trust as the beneficiary of an IRA because I hate trusts.”
One of the children stated, “Dad wants it left to a trust for the benefit of a child so that Dad has the assurance that when the child dies, the remaining IRA would go to the child’s siblings.”
What should they do?
We talked about some of the advantages of naming the child as the beneficiary of the IRA. Those reasons include:
- Naming a child as a beneficiary, instead of a trust, is simple;
- There are tax deferral advantages to naming an individual as a beneficiary. Not every trust qualifies for “see-through” treatment, thus expediting required distributions;
- As long as the beneficiary does not squander the money, the beneficiary can then name beneficiaries to inherit the “inherited IRA” when the first beneficiary dies.
- Many attorneys, CPAs, financial advisors, trustees, and beneficiaries don’t understand the complexities of naming a trust as a beneficiary – thus complicating the estate settlement of the IRA owner.
- If a spouse is a beneficiary of the trust, the spouse will not be able to defer tax as long as if the spouse was named as the individual beneficiary.
Some of the reasons to name a trust as a beneficiary of an IRA include:
- The IRA owner is ensured that when the first trust beneficiary dies, the remainder of the IRA will pass for the benefit of the people that the IRA owner hopes to get the IRA;
- A trust prevents the first beneficiary from squandering the IRA because another party will serve as the trustee;
- If the trust is established properly, the trustee can use the age of the beneficiary for purposes of required minimum distributions.
The decision regarding whether to name individuals versus a trust as the beneficiary of an IRA can be a complex, but important decision. The wrong decision can have adverse income tax effects, or it can cause the IRA to be squandered by the wrong people for the wrong reasons.
The estate lawyers of Krause Donovan Estate Law Partners, LLC practice law in the areas of Probate, Wills, Estate Planning, and Trusts. We assist clients in and around Madison, Wisconsin with all matters related to estate planning, trusts, and probate matters. Our dedicated attorneys will even make house calls if you are unable to come to our office.
Contact our office by calling (608) 268-5751 to schedule a free consultation or use our online contact form.