Can a Trust Own an Inherited IRA and How It Works

A trust can indeed own an inherited IRA, but there are specific rules and requirements that must be followed. The trust must be a valid beneficiary of the IRA, and the IRA must be inherited from a person who has passed away.

To qualify as a valid beneficiary, the trust must be a "see-through" trust, meaning it must allow the IRA administrator to determine the beneficiaries of the trust. This is in line with IRS regulations, which state that a trust is a valid beneficiary if it meets certain criteria.

If a trust is not a see-through trust, the IRA administrator may not be able to determine who the beneficiaries are, and the trust may not be able to take possession of the IRA. This can lead to tax implications and other complications.

Naming a beneficiary can have a significant impact on the distribution of an inherited IRA. Prior to 2020, beneficiaries inheriting IRAs were often able to "stretch" distributions over their life expectancy.

The Secure Act, which took effect on January 1, 2020, has changed this rule, requiring most beneficiaries to withdraw inherited IRA assets within 10 years of the IRA account owner's death. This rule applies to trusts named as beneficiaries of IRAs.

If a trust is named as the beneficiary of an IRA, the distribution rules may change. For example, if the trust has multiple beneficiaries, the Required Minimum Distributions (RMDs) will begin the year after the IRA owner's death, based on the age of the oldest trust beneficiary.

The Single Life Table divisor for someone age 67 is 19.4 years, meaning the inherited IRA will be emptied in less than 20 years. This can negatively impact the financial benefit for the trust's beneficiaries.

The Secure Act's new rule can be particularly challenging for trusts with multiple beneficiaries, as each beneficiary's life expectancy is not taken into account. This can result in a shorter distribution period and more taxes owed.

IRA beneficiaries have a significant impact on how inherited IRAs are distributed after the account owner's death. The SECURE Act of 2019 and subsequent Treasury guidance have reduced the ability to create a "stretch IRA", which allowed beneficiaries to take RMDs over their life expectancy.

For most individual beneficiaries, inherited IRAs after 2019 are subject to a 10-year rule, requiring the IRA to be completely distributed by December 31 of the tenth year following the year of the IRA owner's death. However, certain beneficiaries, known as "eligible designated beneficiaries" or EDBs, are not subject to this rule and can still enjoy the benefits of a stretch IRA.

Non-individual beneficiaries, such as estates, charities, or certain trusts, may be subject to a 5-year rule or the "ghost life expectancy" rule, depending on the account owner's circumstances. The 5-year rule requires distribution of the entire IRA by December 31 of the fifth year following the IRA owner's death.

To qualify as a see-through trust, a trust must satisfy four conditions:

By understanding IRA beneficiaries and the rules surrounding inherited IRAs, you can make informed decisions about your estate planning and ensure that your assets are distributed according to your wishes.

Fiduciary Trust Company has over 135 years of experience administering trusts and IRAs, making them a reliable partner for managing inherited IRAs. Their expertise in advising clients with trusts is unmatched.

They offer a range of services to support IRA and trust administration, from providing general advice and administrative services to managing investments and serving as a corporate trustee. This expertise is crucial when it comes to planning for and managing the complexities of how IRA distributions to trusts are treated for income tax versus trust accounting purposes.

If you're considering naming a trust as an IRA beneficiary, it's essential to understand the benefits and requirements. A trust can control how individual beneficiaries receive IRA distributions, ensuring that assets are distributed according to the account owner's wishes.

Here are the requirements for a trust to qualify as a designated beneficiary and allow the life of the oldest trust beneficiary to be used in calculating post-death RMDs:

By understanding these requirements and working with a trusted partner like Fiduciary Trust Company, you can ensure that your inherited IRA is managed according to your wishes.

Fiduciary Trust Company has administered IRAs from the time the IRA rules were first established in the 1970s. This extensive experience makes them uniquely qualified to advise on all aspects of IRAs.

They offer a range of services to support IRA administration, from providing general advice and administrative services to managing investments and serving as a corporate trustee.

Their expertise in advising clients with trusts makes them an ideal partner for establishing IRAs that name trusts as beneficiaries. They are experienced in planning for and managing the complexities of how IRA distributions to trusts are treated for income tax versus trust accounting purposes.

Fiduciary Trust Company collaborates with your outside counsel to help ensure that your IRA and IRA beneficiary designations are integrated into your estate plan. This comprehensive approach helps ensure that your IRA is managed in a way that aligns with your overall estate plan.

A trust can be a powerful tool in managing IRAs after the account owner passes away. To qualify as a designated beneficiary, a trust must meet certain requirements.

The trust must be a valid trust under state law. This means it has been properly created and executed according to the laws of the state where it was formed.

The trust must also be irrevocable or will become irrevocable upon the IRA holder's death. This ensures that the trust cannot be changed or terminated once the account owner has passed away.

The beneficiaries of the trust must be identifiable from the trust instrument. This means that the trust document must clearly specify who will receive the IRA assets.

Certain documentation must also be provided to the IRA trustee, custodian, or issuer. This documentation is necessary to confirm that the trust meets the requirements for a designated beneficiary.

Here are the key requirements for a qualified "look-through" trust:

If a trust meets these requirements, the IRA custodian can usually make payments to the trust for distribution to the individual beneficiaries. This can provide a more controlled and tax-efficient way of distributing IRA assets to loved ones.

The SECURE Act has significantly reduced the ability to create a "stretch IRA" for most individual beneficiaries. The 10-year rule now requires IRAs inherited after 2019 to be completely distributed by December 31 of the tenth year following the year of the IRA owner's death.

Certain beneficiaries, known as "eligible designated beneficiaries" or EDBs, are not subject to the new 10-year limitation. These include the IRA owner's surviving spouse, children under age 21, and individuals who are chronically ill or disabled.

The 10-year rule may or may not include RMDs during the ten years, depending on whether the deceased IRA owner had reached their RBD at their death. Non-individual beneficiaries, such as an estate, charity, or certain trusts, are usually subject to either a 5-year rule or the "ghost life expectancy" rule.

Here's a breakdown of the different rules for inherited IRAs:

When a trust inherits an IRA, it needs to understand the distribution options and requirements. A trust can choose to distribute the entire account in a lump sum, which will create a taxable event for that tax year and end the tax-deferral available in the IRA.

A trust may also be able to disclaim IRA assets within nine months after the IRA owner's death. This option is available in some instances, but its specifics are not outlined in the provided article sections.

An Inherited IRA allows beneficiaries to keep the funds growing tax-advantaged in an IRA while taking distributions. The account titling will always refer to the deceased IRA owner with the trust listed as the beneficiary.

The distribution options for an Inherited IRA include the five-year rule, which requires the entire balance to be distributed no later than five years from the end of the year in which the IRA owner died. This can help the trust avoid having to pay taxes on the entire amount in the first year, but requires larger distributions over a shorter time.

Here is a summary of the distribution options if a trust inherits the funds and the IRA owner has passed away either before or after their Required Beginning Date (RBD):

The IRA beneficiary process can be complex, but understanding the basics is essential. Prior to 2020, beneficiaries inheriting IRAs were often able to "stretch" distributions over their life expectancy, but the passage of the Setting Every Community Up for Retirement Enhancement (Secure) Act changed this.

Most beneficiaries inheriting IRAs are now required to withdraw the inherited IRA assets within 10 years of the IRA account owner's death. This means that trusts can be a useful tool in managing inherited IRAs, as they can help control how and when assets are distributed to beneficiaries.

If an individual is named as an IRA beneficiary, they have control of the IRA after the account owner passes, which can result in an acceleration of income taxes and subject the assets to creditor claims.

Using a trust as an IRA beneficiary can be a wise decision, especially if you have minor children or a disabled beneficiary. This allows you to control how and when they receive the assets after you pass away.

A trust can ensure that your disabled beneficiary remains eligible for government benefits, which is a crucial consideration. This is especially important if your beneficiary relies on these benefits for their well-being.

If you have minor children, a trust eliminates the need for a conservator to be named to manage the IRA for them. This can be a huge relief for parents who want to ensure their children's financial security.

Inherited IRAs are not protected from creditor claims, which is another reason to consider using a trust as an IRA beneficiary. This can help safeguard your assets from being seized by creditors.

Here are some key benefits of using a trust as an IRA beneficiary:

The IRA beneficiary process can be complex, but understanding the basics can help you make informed decisions. Before naming a trust as the beneficiary of your IRA, it's essential to consider the impact of the Secure Act, which changed the IRA distribution rules.

Prior to 2020, beneficiaries inheriting IRAs could "stretch" distributions over their life expectancy, but this is no longer the case. Most beneficiaries inheriting IRAs now must withdraw the inherited IRA assets within 10 years of the IRA account owner's death.

Naming an individual as the beneficiary of your IRA can be problematic, as they have control over the IRA and can take a full distribution, subjecting the assets to income taxes and creditor claims. This can lead to an acceleration of income taxes and put the assets at risk.

Trusts can be used to control how individual beneficiaries receive IRA distributions from the trust, ensuring that assets are distributed as intended. For example, a trust can ensure that a disabled beneficiary remains eligible for government benefits.

If the account owner has minor children, a trust eliminates the need for a conservator to be named to manage the IRA for the minor child. This can be a relief for parents who want to ensure their children's financial well-being.

Here are some key points to consider when naming a trust as the beneficiary of your IRA: