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Using an IRA Trust to Protect Your Beneficiaries

If you are at all concerned about providing your loved ones with uninhibited access to an inherited individual retirement account (IRA), you may want to consider an IRA trust to alleviate those worries.

In the past, IRA trusts were not very common. But a 2014 U.S. Supreme Court ruling has led to more financial advisors recommending their use to many of their clients. In these cases, advisors will have their client’s name an IRA trust as the beneficiary of their retirement plan instead of naming any individual person.

The ruling that has prompted the more widespread use of these trusts came in the case of Clark v. Rameker. Before that decision, inherited IRAs were classified as protected assets when a person filed for bankruptcy. Now, creditors may access the funds in inherited IRAs, meaning people need to take additional steps to ensure their beneficiaries receive the full value of the account.

The added advantage of using an IRA trust is that it also prevents beneficiaries from receiving their inheritance outright—at least right away. Without such a trust, beneficiaries may take money from an inherited IRA as they wish, so long as they withdraw the required minimum distributions per Internal Revenue Service regulations. An IRA trust helps ensure responsible use of the money, which can provide some peace of mind if you have any reason to believe that an individual is a risk to burn through the inheritance too quickly.

Key considerations with IRA trusts

Before beginning the paperwork to establish an IRA trust, you should understand that the beneficiaries you name on your financial accounts (also including insurance policies and brokerage accounts) will take precedent over anything you write into your will. If your will has your new spouse listed as your IRA beneficiary, but the account itself still has your former spouse listed, then your former spouse still has the legal claim to the benefits.

Therefore, you must make sure that either the beneficiary listed in your will and your IRA match or that you have updated the beneficiary of your IRA to the person you wish to receive the money.

You must also consider who you will name as your trustee. The trustee oversees distributing the assets from the IRA to the beneficiary. This person must have organization skills, can deal with potential conflicts that arise with a beneficiary and willing and capable of carrying out all trust responsibilities to the letter

Finally, it’s important to consider the various personalities and life situations of your beneficiaries. A young adult without any experience managing money could be more likely to be reckless with a sudden inheritance than a middle-aged adult with a family and years of experience handling finances.

Although not everyone should have an IRA trust, more people than ever would benefit from the use of one to preserve wealth for their loved ones while also maintaining some control over asset distribution.

Schedule Your Consultation with Our Experienced California Estate Planning Attorneys

Bartlett & Herrington, P.C. is a top estate planning law firm in California. Our attorneys help families set up living trusts, wills, power of attorneys, healthcare directives in Santa Barbara, Ventura and Montecito. We also serve clients in estate planning matters, probate, elder law, retirement planning, asset protection and Veterans Affairs (VA) aid and attendance planning.

Schedule a planning session with our experienced attorneys today to learn how we can help you and your family: (805) 576-7693.

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