In limited circumstances it is prudent to name a trust as IRA beneficiary. The practice should be used sparingly, however, because it adds a layer of complexity and increases the administrative burden.
When a Trust Makes Sense:
Young Children – If the IRA owner has young children, the share allocable to them should pass to a trust. The beneficiary designation should state that a child will be a “direct” beneficiary if he or she has reached a specified age, and if not, a trust for the benefit of the child will be the beneficiary. For example, the beneficiary designation might state: “The balance in my IRA shall pass to my children in equal shares, with the surviving lineal descendants of a deceased child of mine to take by right of representation the share the deceased child would have received if then living; provided, however, that if any amount is allocable to a person then under ____ years of age, such portion shall be held by the trustee under my will as a separate trust for the benefit of such person pursuant to Article ___ thereof.”
Individual with Developmental Disabilities, Substance Abuse or Extreme Irresponsibility – A trust should be named as beneficiary for individuals in these categories.
Spouse of Second Marriage – Without a trust, a surviving spouse is able to designate the new contingent beneficiaries to take at the spouse’s death. In a second marriage, this might be the spouse’s children, to the exclusion of the children of the first spouse to die. At least theoretically, a trust solves this problem if it (i) relegates the spouse to support related distributions, and (ii) allocates the remaining balance at the spouse’s death to the desired individuals. But who will serve as trustee? If the spouse is trustee, no one may know if the spouse takes excessive distributions. The Oregon Uniform Trust Code requires a trustee to provide reports to remainder beneficiaries, but the spouse may decline to do so and gamble that the decedent’s children will not press the issue. On the other hand, if a child of the decedent is the trustee, friction is inevitable because the spouse will not want to ask (or beg) a stepchild for distributions.
Beneficiary Designation Would be Too Complicated — A client’s will is occasionally so complicated with multiple beneficiaries, fractional shares, formulas, conditional gifts, etc., that a consistent IRA beneficiary designation is certain to be rejected by the IRA custodian. If so, a pragmatic choice might be to designate the client’s estate or revocable trust as beneficiary. While this is conveniently simplifies the name of the beneficiary, it raises numerous tax and administrative issues that will be covered in the next post.
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