An Individual Retirement Account, or “IRA,” is a common type of private retirement plan. An IRA can be either employer provided or self provided, and can give certain tax benefits to the policy holder. Monetary contributions are made to the account with the IRA owner investing this money into most types of securities. The money is held by a custodian, such as a bank or brokerage firm. The custodian is responsible for the actual investing at the direction of the IRA owner. Transactions made within the account, such as interest and capital gains, are not taxed.

It is common for an IRA owner to fail to use all of their funds, and leave the remainder of the account to their heirs. The account is subject to certain restrictions, such as a minimum required distribution. Additionally, the new beneficiary may not understand the benefits of withdrawing only the minimum amount, and letting the investments accumulate so that the money lasts. To remedy this, many IRA owners now create a trust in their wills so their IRA accounts are left to the trust, with their heirs as the beneficiaries. This type of trust is known as an IRA Inheritor’s Trust.

Essentially, the main purpose of an IRA Inheritor’s Trust is to prevent overspending or using up all of the retirement funds too early. It is most effective when the funds are spread out over time. The trustee is responsible for making sure that the money in the account is distributed correctly through minimum distributions. What this does is ensure that the money lasts as long as possible, and that the beneficiaries are getting the most out of the account. Another benefit to an IRA Inheritor’s Trust is that the trust provides protection from creditors, or loss in a divorce.

What Are Some of the Pros and Cons Associated With an IRA Inheritor’s Trust?

IRAs in general have some benefits, such as being able to make contributions without being taxed annually for your capital gains. Traditional IRA benefits include:

  • Tax deductible contributions;
  • Earnings and gains are not taxed, which allows those investments to grow;
  • Anyone earning an income can contribute to an IRA account; and
  • The IRA contributions can be used on investment options, such as mutual funds, stocks, bonds, and CDs.

As previously mentioned, the biggest benefit to an IRA Inheritor’s Trust is that the money is less likely to be spent recklessly, or too quickly. It ensures that the funds are stretched out over time, in order to maximize the efficiency of distribution. Additionally, an IRA Inheritor’s Trust can avoid certain IRS penalties, such as those associated with failing to make minimally required fund distributions to beneficiaries.

However, there are some disadvantages regarding an IRA Inheritor’s Trust. The trustee will need to ensure that the requirements for minimum distribution are being met; failure to do so could result in tax penalties. And, beneficiaries relinquish some amount of control over the IRA funds in exchange for the guidance and direction of the trustee.

The person who inherits the IRA will face the same tax implications that the original owner did; the money received from the account will not be taxed as income. The account’s trustee will ensure that the account does not become subject to IRS penalties due to failing to make the required minimum distributions.

What Are Some Disputes That Are Associated With IRA Inheritor’s Trusts?

IRA Inheritor’s Trusts are largely dependent upon the skill and knowledge of the account’s trustee. As such, one of the most common disputes associated with IRA Inheritor’s Trusts occurs when the trustee fails to manage the trust in a manner that is efficient and lawful. An example of this would be if the trustee overlooks the legal requirements for minimum distributions. Such a failure could negatively impact the trust’s beneficiaries.

A dispute may also arise when one or more beneficiaries are attempting to claim the funds in opposition to the trust instructions. A similar dispute would be a will contest in which a family member may take issue with the way property is being distributed in a will. In such cases, the dispute could lead to a lawsuit that involves contentions between beneficiaries and/or the trustee.

Do I Need an Attorney for IRA Inheritor’s Trusts?

You should consult with a skilled and knowledgeable estate attorney if you would like to set up an IRA Inheritor’s Trust, or are facing issues related to an IRA Inheritor’s Trust. It is important that the trust is set up by an experienced attorney, whether a tax attorney or an estate attorney, to avoid any possible tax penalties as well as other disputes. An experienced attorney can also represent you in court, should any disputes result in a lawsuit.