IRS Rules on Naming a Trust as a Beneficiary of an Inherited IRA

High trust tax rates could cost your beneficiaries.
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Typically, you name a specific person as the beneficiary of your individual retirement account so the named person inherits the IRA upon your death. In some cases, you may prefer that the money go into a trust so you can exercise more control over how the money ends up being spent. To avoid pitfalls of naming the trust as your IRA beneficiary, you need to know the federal rules.

Trust as Beneficiary

You can name a trust as the beneficiary of your IRA, but the trust can't be the designated beneficiary for purposes of calculating the required minimum distribution. The designated beneficiary's life expectancy is used in figuring the distribution period for the IRA if the account owner died before beginning RMDs or if the designated beneficiary's life expectancy is longer than that of the deceased if the owner died after starting RMDs. Unless the trust meets specific criteria for an exception, the trust must distribute the entire value of the IRA within five years or, if the owner had already started RMDs, through annual distributions over the decedent's remaining life expectancy.

Beneficiaries and RMDs

If the criteria are met, the life expectancy of the trust beneficiary can be used when figuring RMDs so a longer distribution period can be used. The trust must be valid under state law, it must be irrevocable or become irrevocable on the account owner's death, the beneficiaries of the trust must be clearly identified in the trust document and the IRA trustee must have a copy of the trust document and any amendments. The IRA trustee must receive the information on or before Oct. 31 in the year after the owner's death. For example, if a trust names a 25-year-old as the beneficiary and meets the criteria, the 25-year-old's life expectancy can be used as the distribution period rather than the account owner's life expectancy or just five years.

Advantages of Trusts

If you want to leave your IRA to someone who may not be able to use the money appropriately, such as a young child or someone with a disability, putting it into a trust allows you to entrust the money to a trustee to spend it. In addition, if you are concerned that a beneficiary might not spend the money in the way you would like, you can specify which expenses can be paid with the IRA funds. For example, you could specify that only college education costs be paid with funds until the beneficiary obtains a college degree.


There are several potential drawbacks to naming a trust as an IRA beneficiary. First, distributions are taxable to the trust to the same extent that they would be taxable to the account owner. Trust income tax rates are typically higher than the rates for individuals, so unless the trustee has the authority to pass through the income to the beneficiary, more of the IRA could go to paying taxes. In addition, if you are leaving money to your spouse and you leave it to a trust, your spouse can't elect to roll the money into her own IRA.

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