It may be a good idea to invest your Roth assets in a trust after you die, as long as you’ve chosen the right type of trust and your beneficiaries are specifically named in the trust. A conduit trust makes the minimum distributions (RMDs) required by the beneficiary each year. You can’t trust your individual retirement account (IRA) to a trust fund as long as you live. However, you can name a trust as the beneficiary of your IRA and prescribe how the assets should be handled after you die
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This applies to all types of IRAs, including traditional IRAs, Roth, SEP, and simple IRAs. If you want to set up a trust and include your IRA assets as part of your estate plan, it’s important to consider the characteristics of an IRA and the tax consequences of certain transactions. When an IRA merges into a trust, the account is usually well protected against potential creditors or other value threats, such as divorce or bankruptcy. For example, many retirement accounts (including IRAs) are fair game during a divorce and can be split between spouses as part of a so-called divorce transfer incident
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However, if one of these spouses is the beneficiary of IRA funds held in a trust, those funds are generally excluded from the calculation of marital property. A trust as an IRA beneficiary can get you one step closer to achieving estate planning goals. It can ensure that most of your IRA assets are retained until your heirs are older, perhaps until they retire. However, setting it up costs more and has other pitfalls
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Consider the pitfalls and alternatives before making your choice. Distributions of inherited Roth IRAs are not eligible for an extension unless the distributor is the surviving spouse of the IRA owner. Therefore, advisors should be careful when it comes to advising clients to name companies as beneficiaries of their retirement accounts when the goal is for identifiable people to inherit IRAs directly. Nonetheless, at least one of the professionals involved should have known that Jackie might not have been allowed to transfer it to her own Roth IRA without PLR
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Accumulation trusts differ from conduit trusts in that they give the trustee discretion in deciding whether to pay out or withhold distributions from the inherited IRA. Prior to Secure Act 1.0, beneficiaries could extend the required minimum distributions (RMDs) over their life expectancy while allowing the remaining balance to potentially grow in an inherited IRA account for tax purposes. The trustee can, of course, withdraw more than the required distribution from the IRA at any time. However, the SECURE Act has the effect that all inherited IRA assets would be distributed to the beneficiary within 10 years of the original IRA’s death
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He can surrender his IRA to a conduit trust for the benefit of his spouse and name his children as the remaining beneficiaries of the trust. Accumulation trusts, however, are likely to result in additional income taxation, particularly if IRA distributions are withheld in the trust. They could even be below the IRA’s annual income and profits, allowing the IRA to grow for years despite the distributions. The IRS uses this information to determine whether or not a distribution that is excluded from income on the recipient’s tax return due to the transfer was transferred to an IRA.
If an investor leaves a balance in their IRA account after they die, it may be beneficial to bequeath that IRA and its investments to a trust under the following circumstances. The advantage of the IRA trust fund is that distributions are controlled by the trustee and not by the beneficiary
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