Should IRA be Payable to Trust if Beneficiaries are Minors?

 In Retirement Plans

Question:

I am a divorced, 60-year-old man. I will pay child support for about the next nine years. I have four children ages 13 to 22. I have a revocable living trust. But there seems to be a gap in how I will handle the IRA inheritance to my children. Most of my assets are in IRAs. The trust seems to work for non-IRA assets. I have named my children as beneficiaries of the IRA accounts rather than the trust. I have researched and I think I may need an IRA Trust(stretch) as a conduit trust. Is that right?

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Response:

Yes, that makes sense. Naming a properly-drafted trust as beneficiary of your IRA can achieve a number of goals. It makes sure that your children don’t gain control of their shares of the IRA at an age when they may not be ready to manage the funds. Hopefully, you’ll live a long time and that won’t be an issue, but now it is. Someone who inherits an IRA must take required minimum distributions (RMDs) based on her own life expectancy beginning a year after the death of the retiree as opposed to waiting until after age 70 1/2 as you can do with your own retirement account. This is a relatively small amount for a young beneficiary. However, the beneficiary of the inherited IRA is also free to take out more, up to the entire IRA. This usually doesn’t make financial sense because it means paying taxes on the distribution immediately rather than benefiting from investment benefits of “stretching” the IRA. The use of a trust can prevent the beneficiaries from taking such unwise steps.

In addition, the trust can help with financial aid at college and provide protection from creditors and in the event of divorce.

One issue you need to consider is whether to create a “conduit” trust, as you suggest, or an “accumulation” trust. The terms of a conduit trust require that the RMDs be distributed outright to the beneficiaries each year. An accumulation trust permits the trustee to hold and invest the RMDs or to spend them on behalf of the beneficiary rather than distributing them outright. This may make more sense given your children’s current ages. It’s just a bit more complicated to draft than a conduit trust, so make sure you work with an attorney with expertise in this area.

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