Estate Planning: Should a Trust Be the Beneficiary of Your IRA?

by Clark M. Blackman

It is common practice to include testamentary trusts in estate planning documents—and with good reason. They can provide significant tax and non-tax benefits in your estate plan at a moderate cost.

Testamentary trusts are trusts that, although currently documented in your will or “living trust,” come into existence at your death. Until that time, these trusts may be modified or revoked, do not contain any assets, and are not subject to active administration by the trustee. However, at death, assets earmarked for these trusts are transferred to them, the trusts become irrevocable, and the trustee assumes responsibility for prudent management of the trust and its assets.

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Because these trusts offer tax and other estate planning advantages (such as creditor protection and ultimate control), it can be beneficial for some individuals to provide that all or a portion of their retirement plan assets (both individual retirement account (IRA) assets and tax-qualified retirement plan assets) pass to a testamentary trust upon their death. To do this, the trust is named as the beneficiary of the retirement plan or IRA. In practice, however, this is not as simple as it sounds.

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