Most
IRA owners have named one or more primary beneficiaries to the account in the event
of the owner’s death. Oftentimes successor beneficiaries are also named to
ensure the funds pass as desired where the primary beneficiary has died as well.
The beneficiaries will be required to take distributions as specified in the
tax code and pay the associated taxes, though they may also take additional
distributions as desired. The distributed funds are not protected from the
beneficiary’s creditors and a spendthrift may quickly exhaust the IRA. This
lack of control may not be the ideal result in every case and the IRA owner may
wish to consider further planning for the IRA account(s). IRA
trusts allow for some flexibility in terms of how the funds are distributed to
the beneficiaries following the plan owner’s death. Most typical is the conduit
trust which passes the full amount of the required minimum distributions
directly to the beneficiary, together with any additional distributions
received by the trust from the IRA. The trust can provide that any additional
distributions (above the RMD) must satisfy conditions stated in the trust,
protecting the funds from being dissipated quickly. The
accumulation trust is more restrictive for the beneficiary as it does not pass
the entire RMD to the beneficiary and instead retains a portion of the RMD in
the trust. This has the benefit of allowing the trust to grow while the assets
in the trust benefit from continued asset protection. The downside, of course,
is that the trust will be required to pay the taxes on the retained RMD and
other distributions and usually at a much higher rate than an individual
beneficiary. Where
there may be a need to exercise some control over the IRA and preserve asset
protection, an IRA trust may be a valid consideration. Consult with your tax
professional and other advisors to ensure that this approach could work and how
it will further your estate and tax planning goals. This is a constantly
changing area of the law and what might have worked in the past may not work
going forward. |