“...in this world nothing can be said to be certain, except death and taxes”

— Benjamin Franklin

IRA Planning Fact Sheet


1. What is an IRA Trust?


An IRA trust protects the wealth of an IRA account for the benefit of your heirs. A large retirement account needs special estate planning. By establishing an IRA trust to receive the assets of an individual retirement account, you can better control the distribution of the IRA assets and help that wealth survive any unforeseen circumstances that may affect your beneficiaries.  Rather than leaving an IRA account directly to your heirs, an IRA trust is named the direct beneficiary of the IRA.  Your heirs are then named as beneficiaries of that trust.  The IRA is protected from any debts amassed by the beneficiaries since the trust itself is the direct beneficiary.   Other benefits of this arrangement include the ability of the trust grantor to control the manner and timing of the distribution of wealth and the opportunity for the grantor to preserve the deferment of income taxes over the life expectancy of the beneficiaries rather than the heirs receiving the IRA immediately and being taxed in a lump sum.


2. Is my IRA protected from creditors?


While your IRA is protected against the claims of creditors during your lifetime, once the IRA assets pass to your beneficiaries, the IRA’s protected status is lost in most states.  The United States Supreme Court has ruled that an inherited IRA for a non-spouse beneficiary is no longer protected from creditor’s claims when the beneficiary files for bankruptcy.  An IRA Trust protects your beneficiaries’ inheritance from creditors, law suits, predators and divorce.


3. What if my beneficiary is a minor?


An IRA trust greatly simplifies the process of leaving IRA assets to a minor. If you wish to make a minor child beneficiary of an IRA, a guardianship must be appointed or a conservatorship established, to manage the IRA assets until your heir turns 18 years of age. (or 21 in some states) In many cases, the probate or surrogates court appoints a conservator to oversee the IRA – and this person may not be who you would have chosen. This process can be a complicated and lengthy and may reduce the benefit your heirs get from the inherited assets.   Once the minor child reaches 18 in most states, some states its 21 years old he or she has immediate access to all funds in the retirement account without restriction. The potential loss in lifetime tax savings from an uninformed 18-year old immediately distributing a retirement account rather than exploiting the tax favorable ‘stretching’ of the distributions over their lifetime  is enormous and the immediate tax consequences of immediate withdrawal can be devastating.  When an IRA passes to a trust instead of outright to a minor beneficiary, the trustee chosen by you administers distributions in accordance with your wishes.  The trustee can ensure that the inherited account qualifies for the most tax-favored distribution schedule, deferring taxes as long as possible (or, in the case of an inherited Roth account, retaining the benefit of tax free growth as long as possible).


4. Can I control how the Trust is distributed?


You may have reservations about giving your heirs unrestricted access to an inherited IRA.   An IRA trust may give you peace of mind that your heirs will be protected even from themselves. The IRA Trust will protect the beneficiary from his or her own bad decisions, excessive spending habits, and inexperience with investing, and grasping spouses.   An heir may be overly tempted to simply cash out the IRA and pay the taxes instead of taking advantage of deferred distributions.  The trust will detail and define exactly how much your heirs are able to receive each year and delay when they gain control over the assets. This will create an ongoing legacy for your family since the IRA assets that are not used during a beneficiary’s lifetime can continue in trust for the benefit of the beneficiary’s descendants.


5. How are the IRA trust distributions determined?


The age of the oldest beneficiary is used to set the life expectancy on which the required minimum distributions (RMD) from the inherited IRA will be based.  Separate trusts or sub trusts can be established when there are multiple beneficiaries who widely vary in ages (example: age 2, age 60).  If children and grandchildren who inherit IRA funds keep the funds in the IRA for their lifetime and only take the required minimum distributions each year, thereby ‘stretching out’ the assets,  the amount of wealth that can be retained in the family is quite significant.


6. Can an IRA trust work for a blended family?


For families with children from multiple marriages, a trust can help you make sure every member of your family inherits according to your wishes. If you are in a second or later marriage and you and your spouse have a blended family, then your IRA Trust can be designed to give your Trustee access to your IRA for the benefit of your spouse during his or her lifetime, but after your spouse dies you can dictate that what is left in the IRA Trust will go to the beneficiaries of your choice. This will keep your IRA out of the hands of your spouse’s family or a new spouse if your spouse chooses to remarry.  You can also determine how the trust remains in your direct family line by designating your children as the original beneficiaries, and then, when the children eventually pass the trust on, the trust can specify the grandchildren as trust beneficiaries rather than surviving spouses of the children.


7. How is an IRA trust affected by an heirs divorce?


Although an inherited IRA is not a marital asset, it is “on the table” in a divorce because it can be transferred as part of a divorce settlement. It is likely that you would not want a child’s ex-spouse to get their IRA or a child’s new spouse to inherit because both carry the risk that the grandchildren will be disinherited. An IRA trust is protected against divorce seizure.   For example, a beneficiary son going through a costly divorce wants to use his stipulated portion of the trust to help pay his ex-spouse, but he is prohibited from liquidating the assets of the trust.


8. What are the options if my spouse is my beneficiary?


If a spouse is going to be the first beneficiary of an IRA it can be more advantageous to younger heirs if the IRA is initially passed on as a spousal rollover. After the surviving spouse dies, it can be left to younger heirs, using their date of birth to set the amount of the distributions — which gives them a longer period over which distributions can be stretched.  That preserves the tax benefit for as long as possible.   With a cascading beneficiary system, a spouse is named as the primary beneficiary and the trust as a contingent beneficiary. This allows more flexibility, as the spouse can choose to roll over the assets or disclaim his or her position to the trust within 9 months.


9. How do you establish an IRA Trust?


The process is done through the Law Office of Gail L. Abrams by an Attorney in our firm who specializes in IRA Trusts. We will work with you to understand your family issues and desires on how you wish your IRA to pass to your family or love ones. Usually, in our firm, the trust is a separate stand-alone document. If you are married the spouse is Primary Beneficiary so they can elect a spousal rollover (except in second marriages and Blended families) and the Trust is named Contingent Beneficiary. Both spouses should have a separate IRA trust. The IRA owner would discuss with us who they wish to name as Beneficiaries of the IRA and decide who manages it for them as well as what limits and protection there are for the heirs. The IRA trust ensures the asset is left exactly the way a client wants their heirs to inherit the IRA asset. This type of trust applies to all types of IRA’s, including Traditional IRA’s, Roth, SEP, and simple IRA’s. If you have a 401(k), Keogh, or 403(b) plan you must first roll it to an IRA to set up an IRA Trust.

Any questions you may have you can attend one of our free estate planning seminars or call our office to set up a consultation with one of our attorneys at (908) 753-4155.