Tuesday Tax Tip – Naming a Trust as Your IRA Beneficiary – 4/23/19

Do you plan to name your trust as the beneficiary of your IRA? While a trust may be ideal for most of your estate, naming a trust as the beneficiary of your IRA is not usually the most tax efficient move.

Even assuming a trust has been properly drafted (commonly called a “see-through trust”), a Multi-Generational IRA (MGIRA) strategy is not available if there are multiple individual beneficiaries.

Beneficiaries will all be stuck using the oldest trust beneficiary’s life expectancy for purposes of calculating RMDs. The opportunity for the youngest trust beneficiaries to enjoy tax-deferred distributions over their (usually longer) individual life expectancies is eliminated.

When it comes to taxes, RMDs will be taxed based on the individual income tax rate of the RMD recipient. This means that if RMDs are “trapped” in the trust, trust tax rates apply. Trust taxes hit the highest bracket (37%) for trust income over $12,750 in 2019.

There will always be situations where a trust makes sense. However, make sure you have all the facts and seek advice from qualified advisors and qualified trust attorneys. They will help ensure your trust is set up to operate according to your distribution plan and will satisfy your personal planning goals.