IRA Trust Planning Is Now a Maintenance Obligation

Designating a trust as your IRA beneficiary makes sense when the point is protecting a vulnerable minor or preserving government benefits, but the same structure can create a tax problem when it is unnecessary, outdated, or never actually named on the beneficiary form. Sarah Brenner, director of retirement education at Ed Slott's IRAHelp, works through four common mistakes in a new checklist, and the recurring lesson is that drafting the trust is only the start.

Creating the trust when there is no real need for it is the first mistake, and the cost shows up after the fact: when an unnecessary trust is named, Brenner says, the beneficiaries often end up petitioning the IRS for a private letter ruling to allow a spousal rollover or inherited IRAs. Those rulings do have a track record of success, but they are expensive and time-consuming, on top of the money and effort already spent on the trust. If the goal is simply direct beneficiary treatment, the better move is to name the people, not the trust.

The second mistake is paying the entire inherited IRA to the trust in one distribution, which strips the account of the tax-deferred status the client spent a lifetime building. Brenner's fix is to establish the inherited IRA for the trust and distribute only required minimum distributions or other intended amounts to the non-qualified trust account.

The third mistake is more administrative than technical: the trust never makes it onto the beneficiary form, and a perfect trust document is useless if the custodian's records still list an old beneficiary or the estate.

The fourth mistake carries the most current weight, because the SECURE Act has been in place for several years and many IRA trusts still operate under the old rules. Brenner advises reviewing and potentially revising existing trusts, with conduit trusts often needing to become discretionary-type trusts either to distribute within the 10-year payout period and smooth the tax bill or to hold assets beyond the 10 years for continued protection.

The checklist is, in effect, a reminder that an IRA trust is a living document, and for advisors the immediate work is a beneficiary-form check, a payout-structure review against the 10-year rule, and a conversation with estate counsel. Start with the form: it is the cheapest fix, and leaving an unnecessary trust in place is how beneficiaries end up petitioning the IRS for a private letter ruling.