I often receive some form of the following client or reader question:
I have named my spouse as the primary beneficiary for my IRA account. I want my children to inherit the assets next. My children are the heirs named in my trust. Should I name my trust or my children as the contingent beneficiaries on my IRA beneficiary designations?
It used to be that protecting your heir’s inherited RMDs was the most important reason to consider using outright beneficiary designations rather than a trust.
However, after the SECURE Act became law in late December 2019, most heirs now receive the same RMD distribution schedule regardless of whether the assets are inherited in trust or outright. This makes most older articles about IRAs and trusts a little outdated, opening up new possibilities. Now, an “eligible designated beneficiary,” those who receive some kind of stretch provision, are only those who are:
- the surviving spouse,
- a child who has not reached majority,
- a chronically ill individual, or
- an individual more than 10 years younger than the decedent.
Everyone else, including trusts, does not receive RMD stretch but instead must distribute the whole IRA within 10 years. You can read more about this in “How to Change Your IRA Beneficiary Designations After the SECURE Act.”
Although for many the RMD divisor is no longer a reason to keep your IRA out of trust, there is still a compelling reason to reconsider naming your trust as the designated beneficiary.
To inherit an IRA where you are named as the beneficiary requires a copy of the death certificate, one notarized signature, and one form (Inherited IRA Application at Schwab). This can be completed in an afternoon.
To inherit an IRA outright as an heir where the Trust is named as the beneficiary requires a minimum of an IRS EIN application, 5 forms, 3 notarized signatures, 3 document requests, and 2 phone calls. Even with everyone’s focused attention and the help of a professional, the process will likely take at least 2 months.
Having helped many heirs settle estates, I can share plenty of examples of how trusts complicate an IRA inheritance process which could have more easily been implemented with outright IRA beneficiary designations.
If your trust is going to immediately leave the assets outright to a known set of heirs in known shares such that a successful end result of leaving your IRA to the trust is the same as leaving your IRA directly to the heirs, I am of the persuasion that outright beneficiary designations are a cleaner estate planning solution.
That being said, estate planning decisions all depend on your estate wishes, your trust document, and the circumstances of your heirs. Everyone’s trust has different rules, so there doesn’t really exist generalized trust advice.
If your trust has income restrictions, holds the assets in trust until a specific age, is a common pot, uses complicated logic to determine each beneficiary’s share, or any number of other provisions, then beneficiary designations alone may not be able to satisfy your estate wishes. Although, you might be surprised what you can do with beneficiary designations.
Keeping your estate plan current with your wishes is the most important part of your estate plan. Your documents can be a beauty of estate planning and still be the wrong documents for you. You deserve documents that accomplish your goals. Your heirs deserve a simple estate maintenance process.
The best plans are able to do both.
Photo by Markus Spiske on Unsplash