IRA Inheritor's Trusts: Pros and Cons
What is an IRA Inheritor’s Trust?
An IRA inheritor’s trust is a special type of trust associated with individual retirement accounts (IRA’s). One of the main purposes of an IRA inheritor’s trust is to prevent one of the more problematic issues with IRA’s: that of overspending or using up all the retirement funds too early.
If an IRA is cashed out too soon, a “blow out” occurs, which can be disastrous for the family beneficiaries. IRA funds are most efficiently maximized when the funds are spread out over time, which is better in terms of tax effects.
In an IRA inheritor’s trust, the IRA account isn’t paid out directly to the account owner’s children or heirs. Instead, the named beneficiary is the IRA Inheritor’s trust, which will be managed by an appointed trustee. The trustee is then expected to “stretch” the funds by only taking out the minimum distributions as required by the trust instructions.
What are Some of the Pros and Cons of Using an IRA Inheritor’s Trust?
There are many benefits associated with IRA inheritor’s trusts. An inheritors trust:
- Ensures that the funds are “stretched out” over time to maximize efficiency of distributions
- Avoids certain IRS penalties associated with failures to make required minimum fund distributions to beneficiaries
- Provides many protections for beneficiaries from creditors and during major life events such as divorce
- Prevents losses caused by imprudent spending or “blow outs” that may occur when the beneficiaries have direct access to the funds (instead, the trustee manages distributions)
On the other hand, there are some drawbacks to IRA inheritor’s trusts, including:
- The trustee needs to ensure that the requirements for minimum distributions are being met- failure to do so can result in tax penalties
- Beneficiaries lose some amount of control over the IRA funds, in exchange for the guided direction of the trustee
What are Some Disputes That Can Arise With IRA Inheritor’s Trusts?
As you can tell, IRA inheritor’s trusts are largely dependent on the skill and knowledge of the trustee. Thus, one of the more common disputes in connection with IRA trusts is when the trustee fails to manage the trust in an efficient and lawful way. For example, if the trustee overlooks the legal requirements for IRA inheritor trust distributions, it could have negative effects on the beneficiaries.
Another type of dispute can arise where one or more beneficiaries are attempting to claim the funds in opposition to the trust instructions. This is similar to a will contest, where a family member may have problems with the way that property is distributed in a will. In such cases, the dispute can lead to a lawsuit involving contentions between beneficiaries and/or the trustee.
Do I Need a Lawyer for Help With an IRA Inheritor’s Trust?
The decision of whether to implement an inheritor’s trust depends largely on the needs of the IRA account owner, as well as the maturity of the named beneficiaries. As with any trust, an IRA inheritor’s trust involves a complex interaction between trust and tax laws. Thus, you may wish to hire a lawyer for assistance when drafting and creating an IRA inheritor’s trust. An experienced attorney can also provide representation in court if a lawsuit arises over a trust dispute.
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Last Modified: 06-20-2012 01:49 PM PDT
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