With year-end fast approaching, now is as good a time as ever to review your IRA beneficiary designation forms. It may seem that naming a trust as an IRA beneficiary is a sound decision—and it can be for some individuals. But that doesn’t ring true for everyone.

Since noncompliance with the IRA-required minimum distribution (RMD) rules can be costly, and naming a trust as an IRA beneficiary can limit flexibility to the ultimate individual beneficiaries, it’s important to understand the ramifications of naming a trust as an IRA beneficiary.

Here are six considerations: 

1. In Search Of The Designated Beneficiary

Naming a trust as an IRA beneficiary does not circumvent the RMD rules. On the contrary, noncompliance with the trust-specific rules could have devastating effects—namely, application of the “no-designated-beneficiary” rules. In general, to achieve the most tax-effective treatment under the RMD rules, there must be a designated beneficiary. A designated beneficiary is an individual with a measurable life expectancy. Ostensibly, a trust is not a designated beneficiary because it’s an entity, not an individual. However, a trust will be considered a designated beneficiary if certain conditions are met. These are known as the “see-through-trust” requirements. 

2. See-Through-Trust Requirements

When naming a trust as an IRA beneficiary, it’s extremely important to satisfy the see-through-trust requirements. If an IRA is left to a non-see-through trust, the trust will receive benefits under the “no-designated-beneficiary” rules: either (1) by the end of the fifth year after the participant’s death if the participant dies before age 70-1/2, or (2) the decedent’s life expectancy if the participant dies after the required beginning date.

There are five requirements:

1.       The trust must be valid under state law.

2.       The trust must be irrevocable.

3.       Documentation must be provided to the plan administrator.

4.       Beneficiaries must be identifiable.

5.       All trust beneficiaries must be individuals.

The first three requirements are administrative and straightforward, but the latter two deserve further examination. 

First « 1 2 3 » Next