The Elrod Firm


What’s Wrong With My IRA Plan?

Justin, My financial advisor recently raised a concern about the beneficiary designations on my IRAs. He said naming my living trust as a death beneficiary on my IRAs was a bad idea, but I’m not clear on why. Can you shed some light on my situation? – Stan

Stan, Thanks for the question. You’re not the only one confused on this. When it comes to IRA planning, most investors have three long-term goals in mind. First, they want to make sure their IRAs don’t wind up in probate court when they die. Second, they want to protect their heirs from their own potentially bad decisions and from outside threats, such as bankruptcy, divorce, and litigation. Third, they want to keep those accounts tax deferred for as long as possible.

Naming a living trust as a death beneficiary of an IRA can meet two of these three concerns—it will keep the IRAs out of probate court and will allow you to protect your heirs (if the trust is drafted with those protections in mind). However, when an IRA pays to a living trust at your death, it can no longer remain tax deferred. This sort of beneficiary designation drastically accelerates taxation of your retirement accounts.

Instead, most people will name their heirs as direct beneficiaries of their IRAs, not their trust, because in most cases, their heirs can create survivor IRAs with those funds and keep them tax deferred. This plan, though, does nothing to protect your heirs from themselves and others. If that sort of protection is important to you, and I assume it is since you named your trust as a death beneficiary, you should look into doing an IRA trust, which can meet all three goals with one plan.


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