A prudent part of estate planning is deciding where our assets will go after you are deceased. Thinking objectively about the reality of life and death, you can look at ways to protect your assets for your heirs. One way of directing where your material heritage will go is to set up a trust. The particular assets you bequeath to beneficiaries of the trust either while you are alive or as part of your last will and testament must also be decided.
Grantor, Trustee and Beneficiary
The grantor of a trust may also be called the trustor or creator of the trust. This is the person whose assets make up the trust. The trustee or fiduciary is the manager of the trust and is bound by law to administer the assets within the trust on behalf of one or more beneficiaries, who receive the assets.
If you have put your hard-earned money into an irrevocable trust, knowing just what that entails is important. Regulations regarding irrevocable trusts prohibit the assets in the trust from being distributed to anyone other than indicated beneficiaries. These rules also prohibit the grantor of the trust from retrieving assets later. In other words, when a grantor moves assets into an irrevocable trust, all ownership rights are relinquished, and the original terms of the trust cannot be modified.
Because of tax treatment, putting an individual retirement account into an irrevocable trust can be costly. Internal Revenue Service regulations allow assets in an IRA to accumulate earnings tax-free. However, rules also permit only individual taxpayers to own an IRA. When the IRA is transferred into the trust, the assets in the account lose IRA status with the IRS. The IRS treats the transfer as a distribution, and it is therefore taxable.
Investment earnings from all assets within an irrevocable trust are considered taxable income, and the money taken from an IRA and put into a trust is taxed as ordinary income. In addition, dissolving an IRA prior to the retirement account holder reaching age 59 1/2 years old is considered an early distribution, and tax consequences increase. A 10 percent penalty tax is imposed in addition to the regular income taxes levied.
One way to get IRA assets into a trust without extra tax consequences is to bequeath the account to the trust. This way, you own the IRA while you're alive, and the trust receives the assets in the account upon your death. Thereafter, the trust holds responsibility for making annual distributions from the account and paying income taxes on the proceeds. You can create the trust while living or set up the formation as part of your will. Trust law is complex, and seeking the help of a qualified professional makes good sense.
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- Merrill Lynch Private Banking and Investment Group: Combining Trusts and Life Insurance to Avoid Tax In the Wake of the Fiscal Cliff Compromise
- Heritage Law Center: Should I Put My IRA Into a Trust?
- Wall Street Journal: Trust as Beneficiary of IRA Is a Popular Strategy
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