IRAs and Trusts

I recently read a blog that stated “Naming a trust as a beneficiary of your IRA isn’t a good idea.” It went on and stated that it can get complicated and be done improperly. They did give some considerations to think about:ira-trust-beneficiary

  1. Do you have any good reasons for leaving IRA money to a trust
  2. Make sure the trust beneficiaries are actually people. 
  3. Consider the benefits of a spousal rollover. 
  4. Use separate trusts for multiple beneficiaries.   

First, a lot of our clients are worried about keeping the money in the family. They earned it and they want to see their loved ones benefit from it. This leads to several issues: 1) divorces and 2) young beneficiaries that may use the money unwisely.

Divorce: Inherited property is not considered martial property in Arkansas. However, if you leave it to a child outright, then they will probably commingle funds with their spouse. If a divorce happens after the commingling takes place, it is a lot more difficult to prove what is separate inherited property and what is marital property.

Young beneficiaries: We typically advise our clients that no beneficiary should be their own trustee until they are at least 30 years old. The client still gets to choose the number and some choose 21 and some choose 65. We were all young once and most of us did not have any sense. I include myself in that group.

Second, if a client wants to leave money to a charity, we do not do so with the trust. It causes a lot of problems and the blog was on point for bringing this up. There are many ways to leave money to charity and still allow trusts to be the beneficiary of your IRA. It must be done right and it changes with every person’s specific situation.

Third, most people will leave it to their spouse first and name the trusts for children and grandchildren as contingent beneficiaries. Naturally, this is up to the client and changes with the client’s particular situation.

Fourth, you should use separate trusts for many legal reasons. It also makes the beneficiary feel like they have something special. You left a trust for them and they do not have to share it with anyone.