{"id":1152,"date":"2019-03-26T14:38:49","date_gmt":"2019-03-26T14:38:49","guid":{"rendered":"https:\/\/eralawgroup.com\/?p=1152"},"modified":"2019-03-26T14:38:51","modified_gmt":"2019-03-26T14:38:51","slug":"naming-a-trust-as-your-ira-beneficiary","status":"publish","type":"post","link":"https:\/\/eralawgroup.com\/naming-a-trust-as-your-ira-beneficiary\/","title":{"rendered":"Naming a Trust as Your IRA Beneficiary"},"content":{"rendered":"\n<p><em>By Jessica L. Estes<\/em><\/p>\n\n\n\n<p>Most people with individual retirement accounts (\u201cIRAs\u201d) name their\nspouse and children as the primary and contingent beneficiaries, respectively,\nof their IRA.&nbsp; Or, if they are not\nmarried or do not have any children, their siblings and nieces or nephews.&nbsp; For the reasons outlined below, this may not\nbe the best decision.&nbsp; Though, to\nunderstand why it may not be the best decision, it is important to understand\nthe basics of IRAs and required minimum distributions (\u201cRMD\u201d).&nbsp; Generally, an owner\u2019s funds in an IRA will be\nprotected from his or her creditors, but a RMD will not be protected.&nbsp; A RMD is the distribution that must be taken\nstarting at age 70 \u00bd, which is based on one\u2019s life expectancy.&nbsp; Once the distribution is made, that income is\nnot protected unless state law provides otherwise.&nbsp; When the owner of the IRA dies, his or her beneficiary\nreceives an inherited IRA.<\/p>\n\n\n\n<p>In 2014, the U.S. Supreme Court\u2019s decision in<em> Clark v. Rameker <\/em>sent shock waves through the legal and financial\nplanning industries.&nbsp; The Court was asked\nto decide whether funds held in an inherited IRA were \u201cretirement funds\u201d within\nthe meaning of the bankruptcy statute and thus, exempted from an individual\u2019s\nbankruptcy estate.&nbsp; The Court answered\nthis question with a resounding \u201cno\u201d and specifically held that funds in an\ninherited IRA are not \u201cretirement funds,\u201d rendering those funds available for\npayment to creditors.&nbsp; The Court reasoned\nthat \u201cretirement funds\u201d are monies set aside for a day when one stops working;\nwhereas, an inherited IRA consists of funds that may be used for immediate\nconsumption.&nbsp; Prior to this decision, an\ninherited IRA was considered \u201cretirement funds\u201d and protected from the reach of\none\u2019s creditors.&nbsp; After this decision,\nthough, that is not necessarily the case.<\/p>\n\n\n\n<p>If one\u2019s spouse inherits the IRA, they can: (1) create a new IRA in\ntheir name; (2) roll the inherited IRA into an existing IRA already in the\nspouse\u2019s name; or (3) they can leave the inherited IRA in the deceased spouse\u2019s\nname if the deceased spouse was younger than the surviving spouse so the\npayments can be stretched out for a longer period.&nbsp; If the spouse chooses option 1 or 2, the\nfunds in the account will be protected; however, if the spouse chooses option\n3, likely the funds would not be protected. <\/p>\n\n\n\n<p>Moreover, if a child inherits the IRA, they could stretch out the RMD\u2019s\nbased on their life expectancy rather than their parent\u2019s life expectancy, or the\nchild could take the money all at once.&nbsp;\nEither way, though, the funds would not be protected from the child\u2019s\ncreditors, which may include a bankruptcy court, general creditors, lawsuits\nand judgments entered against them.&nbsp;\nAdditionally, the Supreme Court decision opens the door for Medicaid to\nrecover against an inherited IRA since the federal law allows recovery against\nbeneficiary- designated accounts.&nbsp; <\/p>\n\n\n\n<p>Another reason to name a trust as\nthe beneficiary of your IRA is to protect government benefits for a spouse who\nmay require or is currently receiving long-term care Medicaid benefits, or a\ndisabled child receiving benefits.&nbsp; If those individuals were to inherit\neven a small IRA, it could disqualify them from continuing to receive\nbenefits.&nbsp; Depending on the amount of the IRA, that may or may not matter,\nbut one should be aware of the consequences of such action.&nbsp; <\/p>\n\n\n\n<p>Similarly, if a designated\nbeneficiary (1) is a spendthrift, (2) has a drug, alcohol or gambling\naddiction, or (3) has creditors, or any number of other issues, naming a trust\ncould be beneficial to preserve the funds so it is not depleted quickly.<\/p>\n\n\n\n<p>The trust must be drafted carefully so as not to trigger a five-year\npayout.&nbsp; If the Internal Revenue Service\n(\u201cIRS\u201d) considers the trust as the owner or beneficiary of the IRA, the trust\nmust liquidate the IRA and distribute it within 5 years of the decedent\u2019s\ndeath.&nbsp; However, the IRS will not\nconsider a trust the owner or beneficiary of the IRA if four requirements are\nmet: (1) the trust is irrevocable as of the decedent\u2019s death; (2) the trust is\nvalid under State law; (3) the trust identifies \u201chuman\u201d beneficiaries; and (4)\nthe trustee provides a copy of the trust to the plan administrator or custodian\nwithin 9 months of the date of death.&nbsp; If\nthere is the possibility that a non-human can become a beneficiary (e.g.\nultimate beneficiary is a church or charity), then the 5-year payout rule\napplies. As long as the above requirements are met, the trust will be\nconsidered a \u201csee through\u201d entity and any distributions paid to the\nbeneficiary of the trust, will be taxed at that beneficiary\u2019s income tax rate.<\/p>\n\n\n\n<p>Also, the trust can be drafted in a way that maximizes the payout to\nthe beneficiaries.&nbsp; Likewise, it is\nimportant to decide how the RMD\u2019s payable to the trust will be handled.&nbsp; Giving the trustee the authority to decide\nwhether to make distribution to the beneficiary or to continue to hold the\nRMD\u2019s in trust provides more flexibility and creditor protection for the\nbeneficiary.&nbsp; Depending on your\nsituation, a trust might be the better choice for your IRA beneficiary\ndesignation.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By Jessica L. Estes Most people with individual retirement accounts (\u201cIRAs\u201d) name their spouse and children as the primary and contingent beneficiaries, respectively, of their IRA.&nbsp; Or, if they are not married or do not have any children, their siblings and nieces or nephews.&nbsp; For the reasons outlined below, this may not be the best<span class=\"more-link\"><a href=\"https:\/\/eralawgroup.com\/naming-a-trust-as-your-ira-beneficiary\/\" rel=\"nofollow\">Read More<\/a><\/span><\/p>\n","protected":false},"author":2,"featured_media":1153,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[701,704,707,198,721,36,718,64,722,221,127,719,46,399,712,720,48,109,237,723,135],"class_list":{"0":"post-1152","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-uncategorized","8":"tag-annapolis-attorney","9":"tag-annapolis-elder-law-attorney","10":"tag-annapolis-lawyer","11":"tag-beneficiary","12":"tag-benefits","13":"tag-children","14":"tag-creditors","15":"tag-death","16":"tag-distribution","17":"tag-elder-law","18":"tag-estate-planning","19":"tag-funds","20":"tag-ira","21":"tag-maryland-attorney","22":"tag-maryland-lawyer","23":"tag-protected","24":"tag-retirement","25":"tag-spouse","26":"tag-trust","27":"tag-trust-litigation","28":"tag-will","29":"entry"},"acf":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/posts\/1152"}],"collection":[{"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/comments?post=1152"}],"version-history":[{"count":1,"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/posts\/1152\/revisions"}],"predecessor-version":[{"id":1154,"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/posts\/1152\/revisions\/1154"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/media\/1153"}],"wp:attachment":[{"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/media?parent=1152"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/categories?post=1152"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/eralawgroup.com\/wp-json\/wp\/v2\/tags?post=1152"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}