Mark D. Goldstein, CFP®
Certified Financial Planner
President
SAFE-Money Alliance

NEW MEXICO OFFICE
Pueblo Plaza Executive Suites
1100 S. Main, Suite 10
Las Cruces, NM 88005
(575) 556-2472

TEXAS OFFICE
Intelligent Office Complex
7362 Remcon Circle
El Paso, TX 79912
(575) 556-2472

ILLINOIS OFFICE
Advisors Circle
3701 Algonquin, Suite 150
Rolling Meadows, IL 60008
(877) 442-0698 Toll-Free

Mark@SafeMoneyAlliance.net
www.SafeMoneyAlliance.net

"Guaranteed SAFE-Money Solutions for a Successful Retirement!"



 
I'm often asked whether it makes sense to use a trust as the beneficiary of an IRA.

As always, it depends.

For most people the answer is "No". First of all, it's expensive and really complex. You'll need an attorney or a tax advisor who specializes in IRA trusts (and they don't come cheap, folks!).

Plus, there's NO additional tax benefits gained by having a trust... that can't be gained without one!

In my opinion, the only reason to name a trust as the beneficiary of your IRA is because of personal reasons. Like for example, you want to restrict access to all those hard-earned tax-delayed dollars by certain beneficiaries who might be too young or financially foolish and prone to squandering your life savings on something really dumb.

Of course, those are all reasons to leave any kind of property in a trust... in addition to your IRA, right?

What about the "Stretch IRA?"

Okay, you might want to name a trust as your IRA beneficiary in order to take advantage of the "stretch IRA (aka "multi-generational" IRA) option. What I mean is, you want to make sure that your beneficiaries only receive their "required minimum distributions" (RMDs) each year, in order to maximize the payout over their lifetimes.

And you can GUARANTEE that kind of "control from the grave" by naming a trust as your IRA beneficiary. Yes, ladies and gentlemen, you can GUARANTEE that your wishes will be honored... even after you're gone!

What about second marriages? Having "control from the grave" over the ultimate distribution of your IRA, in the event of a second, third, fourth, etc., marriage would be seem a logical reason to name a trust as IRA beneficiary. You'd use a type of trust called a "QTIP" (qualified terminable interest property trust) in order to give yourself control of the trust principal (the IRA) after your death.

Example: Let's say you're a guy that wants his second wife to have some income, or RMDs, every year to live on if you die first. You also want whatever remaining assets to go to YOUR kids, not hers (assuming there's two sets of kids).

The problem is, if she lives "too long"... and receives those RMDs every year... it's a recipe for disaster! You see, if your kids have to wait for the step mom to die before they receive anything, they're effectively disinherited until she ultimately dies!

That scenario was probably not the intention of dear old Dad (the IRA) owner when his advisor recommended setting up the QTIP trust. He was probably told that the second wife would receive lifetime income payments and then HIS kids would get the principal upon her death.

Well, truth-be-told, if she lives long enough and takes those RMD payments every year, there won't be any principal left for his kids (or his grandchildren)! As a matter of fact, the entire IRA could end up in the step mom's family (there's nothing to stop her from sharing her payments with HER kids)... contrary to Dad's wishes when he set the whole darn thing up.

Bottom line: There's often tension or strained relationships in second marriages between the second spouse and the adult children from an earlier marriage (especially if the kids are older than the second spouse!). And when you've set up a QTIP trust as an IRA beneficiary, sometimes the only way your kids will ever see a dime (because of the RMDs) is if they have their step mom... whacked!

I'm kidding, of course. Sort of.

Using QTIP trusts as IRA beneficiaries can create some very unique problems and one of my reasons for writing this article is to make you aware of their existence... so that you'll generally avoid them.

Mark