Naming a trust as IRA beneficiary can be a problem if you want to extend tax deferral inside your IRA after your death. To achieve this stretchout, four elements must be in place:
- The trust must be valid under state law.
- The trust must be irrevocable, during your lifetime or after your death.
- The individual trust beneficiaries must be clearly identifiable.
- Trust documents must be provided to the IRA custodian.
If these elements are in place, the IRA may be distributed over the life expectancy of the trust beneficiary. Say you leave your IRA to a trust and name your son Edward as trust beneficiary. After your death, Edward has a 27-year life expectancy so the IRA may be stretched out over 27 years.
What if you name more than one trust beneficiary? Generally, distributions must be stretched over the age of the oldest beneficiary. Say you name your son Edward and your two daughters, Ann and Sue, as trust beneficiaries. After your death, Sue (the oldest) has a 21-year life expectancy so your IRA must be paid out over 21 years.
However, new rules permit each heir to use his or her own life expectancy. If separate shares are created by September 30th of the year following the year of the IRA owner’s death, each beneficiary can use his or her individual life expectancy for a withdrawal rate.
