What Determines if a Trust Is Qualified as an IRA Beneficiary?
Original post by Wanda Thibodeaux of Demand Media
An individual retirement account (IRA) is designed to let you set money aside for retirement with tax advantages. Because it is not possible to guarantee that you will live until your IRA funds are completely gone, it usually makes sense to designate a beneficiary for the IRA. You may name a trust as an IRA beneficiary if you wish, but the trust must meet five basic conditions in order to qualify.
When you name a beneficiary to an IRA, you must be clear about who the beneficiary is. Otherwise, the estate executor or administrator may not be able to transfer ownership of the IRA. Include the beneficiary's full name, Social Security number, and address so there is no confusion over who you are referring to. The same rule applies when you name a trust. Those named in the trust must be clearly identifiable in order for the trust to be listed as a beneficiary.
It is not enough that the beneficiaries of your IRA trust be identifiable. They also must be individuals. The primary reason for this is that traditional IRAs have minimum required distributions the IRA owner or beneficiary must take once they reach age 70 1/2. These distribution amounts are calculated by dividing the value of the account by life expectancy. There is no life expectancy for an agency or organization, so a trust won't qualify as an IRA beneficiary if the trust beneficiary isn't a person. Thus, naming your estate or a charity as a trust beneficiary may not be a good idea if you want someone to oversee the IRA for you after you pass away.
To qualify as a beneficiary for an IRA, the trust must be irrevocable or become irrevocable at your death. This means that no one can change the terms of the trust until the purpose of the trust has been fulfilled. This includes terminating the trust. This ensures that if you name a trust as a beneficiary for your IRA, the trust will still exist later on so the IRA actually can go to the trust beneficiaries.
A trust cannot be an IRA beneficiary unless it is valid, which means it meets the conditions set by state regulations. These vary from state to state, but typically, a valid trust is one you intended to create, which clearly names beneficiaries or indicates how beneficiaries should be ascertained. It also generally has one or more trustees who accept their appointment, transfers property to the trustee, and has documentation supporting its existence.
Documentation regarding a trust is of little help for your IRA if the proper individuals do not have it. To qualify your trust as an IRA beneficiary, the documents supporting the existence and terms of the trust must be provided to the plan administrator in a timely fashion.
- Investmentnews.com; IRA Beneficiary Designation Mistakes; Charles J. Farrell; April 2008
- Hackman, Hulett & Cracraft, LLP; Naming a Trust as a Beneficiary of an IRA; Vicki L. Anderson
About the Author
Wanda Thibodeaux is a freelance writer and editor based in Eagan, Minn. She has been published in both print and Web publications and has written on everything from fly fishing to parenting. She currently works through her business website, Takingdictation.com, which functions globally and welcomes new clients.
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