Written by Have you ever wondered, “How can I put my IRA into a trust”? When this question comes up, there are usually two main considerations. First, they’re thinking about the tax implications of their estate. Will this lower or increase the tax burden on my estate? The second question is, how can I make sure my money lasts?
What is the tax implications of a trust?
In most situations a trust is not going to lower your taxes. We work with your attorney or CPA to create a trust that accomplishes your financial goals. In other words, the plan we design is implemented by your attorney or CPA. It is possible to put your IRA into a trust. And when I say IRA, I am talking about the SEP IRA, the simple IRA, the Roth, and the traditional IRA.
With that said, you cannot simply turn your IRA into a trust. The only way you can turn your IRA into a trust is by making the trust, your beneficiary. As long as your trust is your beneficiary, then you can use the proceeds in your IRA to fund your trust. You will name your trust instead of your children, spouse, or favorite pet. I could decide to name my beneficiary, Griggs Family Trust. And when I pass, my IRA is paid out to the trust as the beneficiary.
Make sure you are right with uncle Sam
There are different rules in the tax code as far as the way uncle Sam feels about an inherited IRA. If you are passing your IRA to your spouse, uncle Sam is much nicer about it. However, if you transfer your IRA to your kids or your trust, it is considered a non-spouse transfer. Which ultimately means it has different tax implications than if it were transferred to your spouse.
If you transfer your IRA to your spouse, they can roll some or all of that into their own IRA. Then they wouldn’t have to worry about the overall required distributions until 72. This change was the result of the Secure Act that was passed in 2019. The benefit of being able to roll it into their own IRA is they don’t have to recognize it all as income. They can slowly take the money out each year and keep their tax burden manageable.
Uncle Sam is only going to wait so long
Keep in mind your Traditional IRA is a tax-deferred account. In other words, the money hasn’t been taxed yet. As a result, uncle Sam is going to force you to start taking the money out. Now, if the money was in a ROTH IRA, that is a different story. Your ROTH is an after-tax account; meaning your money has already been taxed. Since it has already been taxed, there are no required minimum distributions (RMD).
While your spouse can limit the tax burden by transferring your IRA into their own. Your children and trust will be considered non-spouse, meaning they only have 10-years to take in the inherited-IRA as income. When you only have 10-years, it increases the likelihood your tax burden will increase. Imagine inheriting $500,000 and having to accept $50,000 a year in income over the next 10 years. That is likely going to put you in a different tax bracket. If you inherit even more, the tax burden is only going to increase.
How long do I have?
When it comes to your trust, you typically have 10 years to claim it as income and roll it into something else. Whether you take it as one-lump sum, or move it from your left hand to the right; uncle Sam is going to tax the transfer as income.
Using a trust for it’s safeguards
We all have different relationships with money. Some are responsible, while others are irresponsible. There are savers and there are spenders. You may have young kids who cannot handle large sums of money right now. Others will have kids with special needs and there caregiver is handling the money. Whatever your concern, a trust can help with that. You can have the money transferred into a trust. Then the caretaker for your special needs child can only access the money in certain increments each year.
If you’re worried about an irresponsible kid versus a responsible kid, you can have a structure where the responsible kid gets their money with few, if any restrictions. While your irresponsible kid will have certain milestones they need to accomplish. Whether you want to them go to college, reach a certain age, start a business, get married, or join the military. You can design the trust in any way you like.
Your trust should convey your values
I’m a big proponent of your trust should convey your values. If your values are the importance of family, then requiring nonprofit and charitable work may be a great way to convey your values. For those who are big on entrepreneurship, then having a trust that funds business ventures is a good way to encourage entrepreneurship. Education? Have your kids go to college or have your trust help pay for their college. The opportunities are endless.
Final thoughts
Turning your Traditional IRA into a trust is as simple as creating your trust and updating your beneficiary to your trust. Once you pass, your money will be paid out to your trust. Your rules of your trust are designed with your financial planner, but executed by your CPA or an attorney. If your goal is to save money on taxes, trusts typically don’t do that. However, if your goal is to pass your values onto your children and ensure they are responsible with your money. Your trust can definitely do that.
Resources:
Investopedia: How Can I Put My IRA In a Trust?
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