Last month we discussed the different types of beneficiaries you can name on your IRA accounts. The beneficiaries with the most perks were the “eligible designated beneficiaries,” like a spouse. But what about naming a Trust as beneficiary? Isn’t that supposed to give loved ones some “VIP” benefits, too? The answer is: maybe.
Post-SECURE Act, most IRA funds left to trusts will be subject to the new 10-year rule. Here’s where caution is needed, because this may create new, unintended results. If you have a trust that’s several years old, you should probably review it and make sure it still accomplishes what you set out to accomplish, in light of the new rules.
For example, let’s say you want your daughter to inherit your IRA assets. But you don’t want her to get all of the money in a lump sum (and possibly spend it in ways you don’t like). One way to control this is by naming a trust as beneficiary, with your daughter as the trustee. However, the language of the trust is now vitally important.
In the past, the trust might have stated that your daughter could receive the “required amount” each year. Under the old rules, no problem: she would receive a small percentage of the assets (the “Required Minimum Distribution”) each year. Under the new rules, there’s now a big problem: there are no longer annual required minimums under the new 10-year rule. All that is required is that 100% is paid out by the end of year 10. So if the language of the trust were to remain unchanged, your daughter could get nothing for 10 years, and then one big chunk at the end of 10 years – just what you did not intend to happen.
Bottom line: review any existing trusts with your attorney to make sure they still fit your overall estate plan and, most importantly, that the trust still works as intended after the SECURE Act changes.
That applies to existing trusts. What if you don’t have a trust set up yet, but you are considering one?
First, examine why you may need a trust. Trusts are complicated and not for everyone. The main reason you would consider using a trust is to maintain control over your assets. Ed Slott advises that trusts should not be used solely for tax advantages, because now, after the new rules, there aren’t any special tax advantages (he says, “there is no tax benefit that can be gained with a trust that cannot be gained without one.”). In fact, trusts can create tax complications, rather than advantages, even when executed perfectly. So it’s a good idea to get very clear on what you want your trust to do and why before you go to the expense and hassle of creating one.
Depending on what you want to accomplish, there are things you can do in lieu of a trust. For example, naming Contingent Beneficiaries on your IRA Beneficiary forms might be a simple action you can take. This action allows you to name who you want to inherit the money, should the Primary Beneficiary(ies) predecease you. If you don’t need to lay out specific conditions for how the beneficiaries use the money, but just want to make sure it gets to the people you want to inherit it, this could be a simple way to do that.
Another consideration is to use Roth IRA Conversions during your lifetime to help eliminate taxes for your future heirs. If you have the cash available to pay the taxes on the conversions, this is a potentially wonderful gift to your beneficiaries. Generally, distributions from Roth IRA’s are tax-free, so not only would you be leaving the gift of tax-free income; you’d also be giving them tax-free growth opportunities, as well.
There are other strategies you can use in lieu of a trust, depending on what you are trying to accomplish and/or what you are trying to protect. An experienced estate planning attorney can be a good ally here.
Bottom line: if you are considering creating a new trust, get very clear on what you want to achieve. Know that sometimes the same outcome can be accomplished in other ways. If you do decide to pursue a trust, seek the counsel of an experienced estate planning attorney to make sure it operates are you intended.