1. Revocable trusts can be executed and filed with the IRA institution which enables payout (distributions) from the IRA to be payable to separate Revocable IRA Trusts for the benefit of a child or grandchild after the death of the IRA owner. Upon the IRA owner’s demise, distributions will be paid from the IRA institution to the revocable trust. The trustees selected will then issue a check payable to the beneficiary of the trust based upon the life expectancy of the beneficiary and the account balance of the IRA. Any amounts payable to a minor will be payable to a custodian under the Uniform Transfers to Minors Act or similar act for the benefit of such minor.
2. The IRA distribution elections and designation of beneficiary forms will be filed with the institution designating the IRA revocable trusts as beneficiary to receive distributions upon the IRA owner’s demise.
3. The trustee or beneficiary of the IRA Trust may accelerate payments at a certain age contained in each trust.
4. Each trustee will be listed in each trust document together with the powers given to the trustee.
5. All funds given to a grandchild will be taxed at the parents income tax level until they reach a certain age determined under the IRS rules. Thereafter, they will be taxed at their own rate which should be substantially less than the parent’s income tax bracket and the funds bypass the child’s estate tax.
Advantages of the IRA trust as a beneficiary
1. If the IRA death benefits are payable directly to a designated beneficiary, then the death benefits may be accelerated at the designated beneficiary’s will. A trust can prevent unnecessary acceleration.
2. If the IRA death benefits are payable to a trust, the trustee may elect an extended payout period if the IRA owner dies before the required beginning date.
3. A mature trustee will control the investments while the assets are in the IRA.
4. If the IRA death benefits are payable to a trust, they may be protected from the creditors of the designated beneficiary under state law and/or in a divorce proceeding.
5. If IRA death benefits are payable to a trust, they may be protected if the designated beneficiary declares bankruptcy.
6. If IRA death benefits are payable to a trust for the benefit of a minor, it avoids the jurisdiction of the probate court or a similar court that has jurisdiction over the minor’s assets, posting of bonds and appointment of custodians.
7. If IRA death benefits are payable directly to a minor, then the probate court or a similar court is involved. The probate court or a similar court may not go along with an extended payout period of IRA distributions.
8. The trustee may reimburse the estate of the deceased IRA owner for the estate tax liability attributable to the IRA. (In most cases, estate taxes due on the IRA should be paid from another source if available.) This protects the executor of the estate and avoids problems in obtaining reimbursement from a designated beneficiary who may have otherwise dissipated the IRA assets.
9. Multiple IRAs should be established and each may have a different designated beneficiary. This permits income splitting between children and/or grandchildren.
10. A trust for a child or grandchild may be necessary if he or she cannot handle money or would not otherwise reimburse the executor of the estate for the estate tax liability attributable to the IRA on a voluntary basis.
11. The life expectancy of a grandchild will generally result in a greater deferral of income then if a child was the designated trust beneficiary of the IRA.
12. Grandchildren have a greater benefit from the growth of IRA insteade of a child because of their longer life expectancy. This should save a considerable amount of estate taxes on the subsequent death of a child.
13. The revocable trust is not an irrevocable beneficiary. The IRA owner may change his/her beneficiary or designated beneficiary at any time during his/her lifetime. The IRA owner must continue to take distributions from his/her IRA commencing at the required beginning date and as always may accelerate distributions according to his/her date of birth.
Disadvantages of the IRA trust as a beneficiary
1. The legal costs of establishing the revocable trust.
2. The annual costs of preparing trust income tax returns after the death of the IRA owner.
3. The cost of informal or formal accounting of the trust transactions.
