You wouldn’t trust your toddler with a pile of cash, right? Well, this estate-planning technique may allow you to safely pass your IRA on to future generations – if you do it right.
When it comes to naming a beneficiary of your retirement account, the first person to come to mind is likely your spouse. Your kids, if you have them, might be a close second.
However, your children or grandchildren won’t always be in an ideal position to receive a windfall, particularly if they are minors, disabled or spendthrifts.
That’s when a trust might make sense.
“The real reason for having a trust as an IRA beneficiary is because there’s some element of control,” said Ed Slott, a CPA and founder of Ed Slott & Co. “People who name trusts as beneficiaries are doing it to protect a very large IRA.”
It’s easy to mess this up, however.
In the first place, not all IRA custodians permit you to list a trust on your beneficiary form.
Second, the tax code has a specific list of conditions for trusts that act as beneficiaries to retirement accounts. Failure to closely follow the IRS rules could result in an accelerated distribution of your IRA and a raft of taxes.
Here’s what you should know.