Revocable trusts are a great for a number of reasons:
- consolidating assets in one place.
- providing explicit directions upon your death to distribute those assets.
- avoiding the hassles of probate (a lot of time and expenses for your estate executors).
However, there are situations where trusts may not be the best option for you. One instance where they could cause some trouble is when a trust is designated as the beneficiary of your IRA. You see, when someone dies, their IRA is distributed to the designated beneficiaries, who then have to start taking required minimum distributions (RMD) from them. The older the beneficiary is, the larger the amount of the RMD.
So, if you have a standard revocable living trust as your IRA beneficiary and you pass away, your IRA will go to the beneficiaries of your trust. However, the RMD will be based on the age of the oldest beneficiary of that trust. That means that your grandson Johnny, age 14, will have the same RMD as your oldest daughter from your first marriage, Ann, age 48. This can cause a real tax headache for Johnny and his parents plus it prevents Johnny from taking advantage of “stretching” his inherited IRA out over a longer period of time with tax deferral.
There are several ways to avoid this situation. The easiest being assigning actual individuals, instead of a trust, as the beneficiaries of your IRA. That way, the RMD for each beneficiary will be based on their own age.
There are also different types of trusts that are specifically designed to address this issue but are very complicated. Depending on your situation, this may be the best route to go but you will certainly need an estate planning attorney to get this done correctly.
In any case, review your IRA beneficiaries, and if you have a trust, make sure you are setting it up to make the most of your IRA for your heirs.
Please let me know if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
