Listing a beneficiary for your IRA is almost always an advantageous move. It helps ensure that your wishes for the retirement account are carried out upon your passing. Specifically, the retirement account is transferred to the person you’ve listed as a beneficiary. This is far better than having the account go off to probate.
But what if you don’t want to list an individual as a beneficiary of your IRA and instead want to list a trust. Is that possible? Let’s find out.
What Is a Trust?
Think of a trust as an asset protection container. Assets that can be placed into a trust include investments, a house, a life insurance policy, and other assets. Once in the trust, these assets are now owned by the trust and not the individual that previously owned them. A trustee manages the trust and ensures that the trust owner’s (i.e., grantor) wishes are carried out.
The grantor also lists beneficiaries of the trust’s assets. Without a trust or a living will, assets owned by an individual can go into state probate upon their passing.
What Is a Beneficiary?
When someone opens a qualified retirement account (i.e., IRA, 401k, 401b, and Roth), they can list a beneficiary. A beneficiary is someone who will take over or inherit the account in the event that the owner of the account passes. Basically, the retirement account becomes the beneficiary’s account.
The first listed beneficiary is called the primary beneficiary. The primary beneficiary is almost always the spouse. The reason for this is that a spouse can do a spousal rollover. There's no taxable event when the spouse becomes the new account owner.
If there is no spouse or other person to list as the primary beneficiary, the trust can be listed as the primary. In some cases, the primary beneficiary may refuse the retirement account. This is called forfeiting your right. Someone might forfeit their right if they don’t need the income and want to pass the account on to someone else.
To clarify, a beneficiary is not an owner of an IRA while the original owner is still alive. Only when the owner passes does the beneficiary become the new owner.
Listing a beneficiary helps keep property out of probate court and lessens the headache for others who might have to handle the finances of those who've passed.
Trust as Beneficiary of an IRA
Yes — a trust can be the beneficiary of an IRA. If the spouse is the primary beneficiary, this doesn’t exclude the trust from being a beneficiary. Instead of being the primary, the trust will be listed as a contingent beneficiary.
There are two ways for a trust to own property — the property owner or a beneficiary. As previously mentioned, the trust is not the owner of a retirement account while the retirement account owner is alive.
Creating a trust and the reasons for listing it as a beneficiary can get involved. Before deciding to list a trust as a beneficiary, it's best to discuss your specific situation with a financial advisor or accountant.