Couple review trust options

Could An IRA Trust Benefit Your Family?

An IRA is an Individual Retirement Account. This account provides retirement funds with tax benefits so individuals can fund their retirement. However, not everyone will use the full value of their IRA while they are living. Instead, they may need to transfer their IRA to their loved ones at the time of their death. An IRA trust provides a unique way for individuals to transfer IRA funds after they pass. This type of trust can be very beneficial for some families. Roulet Law Firm, P.A. may be able to help you determine whether an IRA trust is a good option for your situation. Contact our Florida office by calling us at (941) 909-4644 or our Minnesota office at (763) 420-5087 to learn more.

What Is an IRA Trust?

An IRA trust is a specific type of trust that is established to hold and administer funds from an IRA after the IRA’s owner passes away. This type of trust is approved by the Internal Revenue Service (IRS) and compliant with the laws of both Minnesota and Florida. This form of trust has several benefits that might be appealing to a wide variety of families.

Normal IRA Designations Without a Trust

Normally, an individual IRA owner will name another person, sometimes or several people, as beneficiaries to the retirement account. Those individuals then receive those funds once the IRA owner passes away. However, if a beneficiary has creditors, then those funds might immediately go to creditors instead of to the beneficiary the IRA owner has designated. In addition, the IRA beneficiary can also do whatever they would like with the funds from the IRA once they receive them.

Using an IRA Trust

Some IRA owners do not want beneficiaries to have a lump sum (or even periodic payments from the IRA over time), with no oversight or direction on how to use that money. They might also want to prevent the beneficiary’s creditors from obtaining those funds as well. An IRA Trust might be a good tool to accomplish both of those goals.

Instead of naming an individual as an IRA beneficiary, the IRA owner can name a trust that they establish as the beneficiary. Then, those funds will pass to the trust instead of directly to the beneficiary. This allows the IRA owner to keep the funds away from creditors and gives them more control over how the IRA funds may be used.

The Benefits of an IRA Trust

An IRA trust is not necessary for everyone, but it can be very useful for some families. If an IRA owner is attempting to meet certain estate planning goals using funds within an IRA, this type of trust can be beneficial.

More Control Over IRA Distributions

Having an IRA trust allows the IRA owner to have more control over distributions than they would have from a simple payable-on-death account. The trustee management aspect of an IRA trust can make this structure attractive to IRA owners who are concerned about the probity of their beneficiaries. An IRA owner might want to provide just a set amount of money per month for a period of several years. Setting up distributions in this way helps ensure that the beneficiary does not spend all of the money at once. At the same time, the trustee designated by the grantor in the trust document can invest the remainder of the money to ensure it grows over time. This type of control is helpful if there is concern about the beneficiary being wasteful or careless if they received an outright large sum of money.

An IRA trust can also be used to help ensure that a special needs loved one has the funds they need for care and general living expenses. They might not be able to handle a large sum of money on their own, but, with the help of a trustee, an IRA trust can provide financial support for years into the future.

Asset Protection

An IRA trust can also provide a helpful means to avoid or limit the beneficiary’s creditors. IRA funds are generally protected from creditors while they sit in the IRA, but when they are distributed following the IRA owner’s death, the funds lose that protection. Instead, creditors can attach to those funds and take them in some situations. However, putting the funds in trust with specific rules on how funds are distributed can help ensure that the funds go to a beneficiary instead of their creditors.

Depending on the value of assets contained and the number of beneficiaries intended, the grantor may wish to consider establishing an IRA trust as a revocable, rather than irrevocable, trust. Because the most common function of an irrevocable trust is to limit tax liability, and IRA funds are not typically taxed until they are withdrawn, in some situations a concerned IRA owner may wish to secure the greater per-beneficiary insurance provided by the Federal Deposit Insurance Corporation (FDIC) for revocable trusts with up to five beneficiaries.

Minimizing Estate Taxes

When IRA funds pass from the IRA account to a beneficiary, they are not included in the IRA owner’s estate. Instead, they avoid the probate process and are transferred directly beneficiaries, or distributed according to the instructions set out in the trust document. That means that someone doing long-term estate planning might want to contribute more to an IRA (up to the annual legal limit) to help decrease the value of their overall estate to decrease their potential estate tax burden.

Minimizing Income Taxes

Additionally, an IRA trust can be designed to provide income tax savings for your family by allowing them to have distributions taken by those who may be in lower income tax brackets. For example, the trust could be designed to allow you grandchildren, rather than your children, take the dsitributions.

Planning for Blended Families

Estate planning for blended families can be difficult for many reasons. In some situations, you might have concerns about how assets left to a spouse after you pass will be transferred on when that spouse passes. An IRA trust can provide some additional control to ensure that children from prior marriages or other loved ones receive the benefits that you would like, regardless of how a new spouse might change their estate planning documents after you pass.

An IRA trust could provide income for a spouse for their lifetime and then switch to providing income for children after the spouse passes. The IRA owner could also set the IRA trust up to provide benefits only to the children that they are concerned about as well. Appropriately planning for blended families can be tricky. Roulet Law Firm, P.A. may be able to help address this type of complicated estate planning situation.

Planning To Address Government Benefits

An IRA trust can also be a good way to plan to provide for loved ones who have special needs. Some individuals with special needs receive benefits from the state or federal government for medical care or other living expenses. These programs often have strict asset and income restrictions. As a result, leaving funds from an IRA might compromise those benefits.

To avoid this issue, an IRA owner could create an IRA trust that will only distribute funds based on a specific schedule or under certain circumstances. This way, the funds are not provided directly to the loved one with special needs in much the same way as a special needs trust, and someone else can administer the funds appropriately.

Is an IRA Trust the Right Option for You?

An IRA trust has many benefits that might fit families of all shapes and sizes. Contact Roulet Law Firm, P.A. to learn more about IRA trusts and how to establish an estate plan that will meet your own and your family’s needs by calling our Minnesota office at (763) 420-5087 or our Florida office at (941) 909-4644.

And, if you would like to learn how to make it as easy and inexpensive as possible for your family to manage your affairs during incapacity and after passing, while ensuring your assets only go to whom you want and how you want, click here to register for our FREE online masterclass.

Chuck Roulet
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Nationally Recognized Estate Planning Attorney, Author, and Speaker
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