A myriad of IRS regulations exist regarding the distribution of an Individual Retirement Account to the beneficiary designated to receive the funds after the account owner's death. If the beneficiary is a trust, the regulations are complex. Before naming a trust as beneficiary of your IRA, care must be taken to establish and maintain the trust so that it qualifies under the IRS regulations for IRA beneficiary trusts.
Qualifying IRA Trust
In order for a trust to qualify for treatment as a beneficiary of an IRA, it must meet several IRS requirements. First, the trust must be valid according to the laws of the state where it was made. Second, the trust must either be irrevocable when made or irrevocable upon the death of the trustor--the owner of the trust. Third, the trust document must identify the individuals who will be the ultimate recipients of the IRA funds. Lastly, the IRA administrator must be given certain documentation by October 31 in the year following the owner's death. This documentation includes the trust instrument and all amendments to it, including a list of all beneficiaries of the trust, along with a written statement by the trustee that the beneficiary list is complete and that the trust complies with the first three requirements noted above.
Distribution of IRA Funds
When the owner of an IRA account dies and the beneficiary is a trust that does not qualify, IRS regulations require the account to be entirely distributed within five years of the owner's death, if the owner died before reaching 70½. If the owner died after age 70½, then the account must be entirely distributed within the owner's remaining life expectancy. However, with a qualifying trust as the beneficiary, the distribution rules are different and more favorable to the recipient of the account funds. In the case of a single individual as beneficiary of a qualifying trust, the IRS regulations permit the individual to be treated as if he were directly named as the IRA's beneficiary---thereby allowing a distribution of funds over the individual's lifetime. If there are multiple individuals named as beneficiaries, the funds will be distributed to each individual over the life expectancy of the oldest beneficiary. By using the lifetime of the beneficiaries rather than the owner for distribution of the funds, a greater tax saving will be realized.
Spouse as Sole Beneficiary
Designating a qualified trust as the beneficiary of your IRA is not advisable, if the sole beneficiary of the trust is your spouse. To do so would defeat the advantage that a surviving spouse has as the beneficiary of a deceased spouse's IRA. Unlike other beneficiaries, a spouse can treat the inherited IRA account as her own, including combining the accounts with any IRA account she may have on her own. This option is lost if the owner of an IRA account designates a trust as beneficiary, rather than his spouse.
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