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Probate and Estate Litigation Blog

IRA trusts protect heirs

Sometimes, limits should be placed on property going to heirs and beneficiaries. Providing an heir with unlimited access to an inherited individual retirement account may be unwise if the heir has debt or money management problems. Naming an IRA trust as a beneficiary may eliminate some inheritance problems, particularly with larger IRAs.

An IRA trust blocks an heir from receiving funds directly from an IRA when the account owner dies. Otherwise, nothing prevents an heir from withdrawing unlimited funds if they take the minimum distributions required by the Internal Revenue Service.

Before a 2014 U.S. Supreme Court ruling, inherited IRAs were protected assets in bankruptcy. Now, creditors may seek these trust assets in most states. An IRA trust, accordingly, provides debt protection. These also protect large accounts, generally those over $500,000, against lawsuits and divorce.

An IRA trust can also be used for other workplace retirement plans such as 401(k) plans although these plans are governed by different laws. An IRA trust my serve as the beneficiary on a 401(k) account and similar Roth accounts.

The trust becomes the owner of the account's assets when an IRA trust becomes its beneficiary. The trust then makes the heir its beneficiary. A trustee, usually a financial professional, is responsible for distributing trust assets from the IRA to the heir. This helps assure that the heir does not have control over the money to spend unwisely, make imprudent investments, or make large withdrawals that may have tax consequences.

One IRA trust is a conduit trust which allows distributions going from the IRA to the trust and then to the beneficiary. The money is taxed at the beneficiary's rate.

The other type is the accumulation trust which receives distributions from an IRA but keeps the funds for distribution to the beneficiary in the future. Distributions are taxed at the income tax rate of the trust which is limited to 39.6 percent.

Beneficiaries on IRAs, life insurance policies, brokerage accounts and other financial accounts override any dictates in a will on inheritance of property. For example, an ex-wife named as a beneficiary on an IRA account will receive the funds instead of the current wife named in the will. Accordingly, beneficiaries must remain current for these trusts

A properly-drafted IRA trust and other estate documents can help protect heirs and avoid duties. An attorney can perform this service.

Source: CNBC, "IRA trusts can protect your heirs from themselves," By Sarah O'Brien, June 14, 2017

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