Unfortunately, you can’t place an individual retirement account (IRA) in a trust while you’re alive. This rule applies to all types of IRAs including traditional, Roth, SEP, and SIMPLE IRAs says Investopedia’s article, “How Can I Put My IRA In a Trust?”
However, if you establish a trust as part of your estate plan and want to include your IRA assets, you need to look at the characteristics of an IRA and tax consequences concerning certain transactions.
IRA accounts were designed to achieve two goals. First, they provided tax-deferred retirement savings for individuals not covered under an employer-sponsored plan. For those who were covered, IRAs provided a spot for retirement-plan assets to continue to grow, when and if the account holder changed jobs via an IRA rollover.
IRA accounts can only be owned by an individual. They can’t be held in joint name and can’t be titled to an entity, like a trust or small business. Contributions can also only be made, if certain criteria are met, such as the owner must have taxable earned income to support the contributions. A non-working spouse can own an IRA but must receive contributions from the working spouse and the working spouse’s income must satisfy the criteria.
No matter the source of the contributions, the IRA owner must remain constant. Only certain ownership transfers are permitted to avoid being categorized as a taxable distribution. If transferred to a trust, IRA assets become taxable, because this transfer is seen as a distribution by the IRS. In addition, if the owner is under age 59½ at the time of distribution, there’s an early withdrawal penalty. The trust can accept IRA assets of a deceased owner, however, and establish an inherited IRA.
Naming a trust as the beneficiary to an IRA can be a good idea, because owners can instruct the beneficiaries on how to use their savings. A trust can be created, so that special provisions for inheritance apply to specific beneficiaries. This can be a helpful option, if the beneficiaries vary greatly in age, or if some of them have special needs to be addressed.
Planning should consider how beneficiaries will take possession of IRA assets and over what time period. Get professional advice from a trust and estate lawyer. Ask the attorney about getting the maximum stretch option for the distribution of the account. The trust will need to have specific terms, such as “pass-through” and “designated beneficiary.” If it doesn’t have terms for inheriting an IRA, it should be rewritten, or specific people should instead be named as beneficiaries.
While moving all assets into the name of a trust and designating it as the beneficiary on retirement accounts is common, it is not always a good decision. Trusts, like other non-individuals that inherit IRA assets, are subject to accelerated withdrawal requirements. Most of the time, these must take place within five years from the original IRA owner’s death. Without the proper “pass-through” terms, stretching the withdrawals over a lifetime isn’t an option. Depending on the size of the account, this could place a major burden on the beneficiaries. It’s especially detrimental to eliminate the spousal inheritance provisions by designating a trust, instead of a spouse as the beneficiary.
Planning for IRAs requires good advice and counsel.
Reference: Investopedia (November 26, 2019) “How Can I Put My IRA In a Trust?”