A trust is a tool that is used in estate planning. The individual who creates the trust is known as the trustor or settlor. A trust directs an individual, known as a trustee, to hold the trustor’s property subject to certain duties. 

These duties include using and protecting the trust assets for the benefit of other individuals, known as beneficiaries.

What is an IRA Inheritor’s Trust?

An IRA, or Individual Retirement Account is a common type of private retirement plan. It can be either provided by an individual’s employer or provided by the individual themselves. It provides certain tax benefits to the policy holder. 

Contributions of money are made into the account with the account owner investing the money into most types of securities. The funds are held by a custodian, which is usually a bank and/or brokerage firm. The custodian is responsible for the actual investing of the funds at the direction of the account owner. 

Transactions made within the IRA are not taxed. These may include interest and capital gains.

In many instances, an owner of an Individual Retirement Account, or IRA, will fail to use all of their funds and leave the remainder to their heirs. These types of accounts, however, are subject to certain restrictions. These may include a minimum required distribution. Additionally, the new beneficiary may not be aware of the benefits of only withdrawing the minimum amount from the account and letting the investment build up so that the funds can be stretched out.  

Many IRA account holders create a trust in their will. This allows their IRA accounts to be left to the trust with the heirs as the beneficiaries. The trustee will ensure that the funds are distributed properly through minimum distributions. 

By placing the funds in a trust, it ensures that the funds last as long as possible and the most possible is gained from the account. Another benefit to creating the trust is that the trust provides the beneficiaries with protection from creditors and/or loss in the event of a divorce.

What is a Trustee?

A trustee is an individual who holds legal title to the property that is contained in a trust. The trustee does not own the property. They have a fiduciary duty to fulfill obligations to the beneficiaries that are imposed by the trust.

Fiduciary duties are obligations to act in the interest of another individual. The trustee is obligated to follow the rules outlined in the trust and work only to benefit the beneficiaries of the trust.

Examples of a trustee’s fiduciary duties may include:

  • A duty of loyalty, which requires the trustee to ensure that the beneficiaries’ interest in the trust property are protected. The trustee may not take any actions in their own favor which would impair the interests of the beneficiaries;
  • A duty of care, which requires the trustee to make decisions with care and diligence. Pursuant to the duty of care, a trustee is responsible for making reasonable decisions regarding when, how, and what to invest; and
  • A duty of accounting, which requires the trustee to make an account of and keep records of all financial transactions that concern the trust property. The trustee must keep detailed records of all expenses required to administer the trust, which may include broker fees.

What are the Tax Implications of an IRA Inheritor’s Trust?

The individual who inherits the IRA will face the same tax implications that the original owner faced. This means that the funds received from the account will be taxed as income.

One major benefit of the trust is that the trustee ensures that the account is not subject to IRS penalties for failure to make the required minimum distributions. It is important to have an experienced tax attorney set up the trust. It is also important for the trustee to be familiar with tax laws in order to avoid any possible tax penalties.

What are Some Pros and Cons Associated with an IRA Inheritor’s Trust?

IRAs have general benefits, which include being able to make contributions without being taxed annually for an individual’s capital gains. Some traditional IRA benefits may include:

  • Contributions that are tax deductible;
  • Investments can grow because earnings and gains are not taxed;
  • Any individual earning an income may contribute to an IRA account; and
  • IRA contributions can be used on investment options, which may include:
    • mutual funds; 
    • stocks; 
    • bonds; and 
    • CDs.

As previously noted, the greatest benefit to an IRA Inheritor’s Trust is that the funds are less likely to be recklessly spent or spent too quickly. The trust ensures that the funds are stretched out over time so the efficiency of the distribution can be maximized. The trust can also avoid certain IRS penalties, such as those assessed for failing to make minimum required fund distributions to beneficiaries.

There are, however, some disadvantages to an IRA Inheritor’s Trust. The trustee must ensure that all requirements for minimum distributions are being met. If they fail to do so, there could be tax penalties. Additionally, the beneficiaries relinquish some amount of control over the IRA funds in exchange for guidance and direction of the trustee.

The individual who inherits the IRA will face the same tax implications as the original owner. The income received from the account will not be taxed as income. The trustee will ensure that the account does not become subject to IRS penalties because the trustee failed to make the required minimum distributions.

What are Some Disputes that are Associated with IRA Inheritor’s Trusts?

There are some disputes that may be associated with IRA Inheritor’s Trusts. These trusts are largely dependent upon the skills and knowledge of the account’s trustee. Because of this, one of the most common disputes associated with this type of trust occurs when a trustee fails to manage the trust in a manner that is efficient and lawful. 

For example, a dispute may arise if the trustee overlooks the legal requirements for minimum distributions. This failure could have a negative impact on the trust’s beneficiaries.

Disputes may also arise if one or more beneficiaries attempt to claim the funds in opposition to the instructions of the trust. A similar dispute may occur in a will contest in which a family member takes issue with the way the property is being distributed in the will. In these types of cases, the dispute could lead to a lawsuit involving contentions between the beneficiary and/or beneficiaries and the trustee. 

Do I Need a Lawyer for IRA Inheritor’s Trust Issues?

Yes, it is essential to have the assistance of an experienced estate lawyer for any IRA inheritor’s trust issues. The laws governing IRAs, wills and trusts, and taxes are all very complicated and can be extremely difficult to understand. 

It is important to have an attorney who is experienced in drafting wills and trusts as well as who is experienced in tax law create your IRA inheritor’s trust. That way, you can ensure all tax penalties are avoided. 

An attorney can explain your options, help you decide what type of will and/or trust is right for you, and draft any necessary documents. Having an attorney draft your IRA inheritor’s trust is the only way to ensure your loved ones receive the funds you wish for them to have without penalty.