An IRA may not be transferred to a trust without causing the whole IRA to be taxed. The “I” in IRA stands for “individual” — it must be owned by a single person. In practice, there is no need to transfer an IRA to a trust since IRA’s avoid probate by having a “designated beneficiary” and the principal of an IRA is exempt from being “spent down” for your long-term care needs. However, an IRA may be left to a trust. In other words you may name a trust as a designated beneficiary of an IRA.
There are many reasons why one would want to leave an IRA to a trust. The beneficiary may be a minor, they may be irresponsible, have substance or alcohol abuse issues, learning disabled, special needs, dominated by a spouse, facing divorce or bankruptcy, or you may simply want to control where the IRA money goes if your designated beneficiary dies before the IRA is completely distributed. Similarly an IRA is often left to the Inheritance Protection Trust to protect it from your child’s divorces or creditors and to keep the asset in the bloodline.
There are two types of trusts that may be named a beneficiary of an IRA — “conduit” trusts and “accumulation” trusts. A conduit trust simply acts as a conduit of the ten year payout under the SECURE Act. In other words, whatever is taken from the IRA must be distributed immediately to the trust beneficiary, the trust acting as a conduit only.
An accumulation trust will more often be a better choice for the purposes described above. These trusts allow the trustee to keep the IRA proceeds in the trust and use them “as needed” for the benefit of the trust beneficiary or group of beneficiaries.
A final word on the payout. Many were disappointed that the “stretch” provisions, allowing a beneficiary to take the IRA distributions over their lifetime, were eliminated by the SECURE Act. However, the beneficiary usually only has to take very small distributions for the first nine years, allowing for virtually a full ten years of tax-free growth on the whole IRA.
Word to the wise: it is a good idea to have an experienced elder law estate planning attorney handle the retitling of the decedent’s IRA to avoid a taxable event from occurring.