If you have a substantial amount of savings in your IRA, and you won’t need the funds in the account for your living expenses during retirement, you may want to consider establishing an IRA Trust. You can leave your IRA to one or more beneficiaries without setting up a trust – that’s what the account’s beneficiary designation is for. But, establishing an IRA Trust offers some benefits that allow you to make the most of your savings on behalf of your loved ones, and even protect your loved ones from their creditors and their own errors in judgment.
An IRA Trust is a revocable trust. You establish it, possibly setting up subtrusts, depending on your intended beneficiaries. Each subtrust can be governed by different guidelines and used for different purposes, depending on your wishes and the needs of each of your beneficiaries.
Once the trust is established, you name the trustee beneficiary of your IRA. If you’ve established subtrusts – one for your spouse and one for your other beneficiaries, then you’ll name the spousal subtrust as primary beneficiary of your IRA and the remaining subtrust as secondary beneficiary. So, when you pass away, the trustee takes control of your IRA funds, and manages them according to the instructions you’ve left.
An IRA Trust can be used to make sure that your beneficiaries take only the required minimum distribution from the account each year. This keeps your account from being immediately cashed out, eliminating the chance for future growth. It can also save your beneficiaries a significant tax bill.
Another use for the trust is asset protection. Allowing limited access to IRA funds keeps your beneficiaries’ inheritance safe from creditors. It can also keep the funds safe from the claims of a spouse during divorce proceedings.
Your estate planning attorney can help determine whether an IRA Trust is appropriate for you and your family.