Should Planners Recommend Trusts as IRA Beneficiaries?

Brown, Cal; Campbell, Thomas
October 2003
Journal of Financial Planning;Oct2003, Vol. 16 Issue 10, p52
Academic Journal
This article stressed that financial planners who recommend naming a trust as beneficiary of a qualified retirement plan or IRA are telling clients to cross a minefield. Trusts have many uses. They can manage property for people who are young or disabled. A trust is often valuable to use in an estate plan. The worst tax situation that could confront a client is if the entire IRA has to be distributed within five years of the owner's death. Five basic rules must be followed if beneficiaries of a trust are to be considered designated beneficiaries of an IRA and thus eligible for stretching the distributions. Taxable income is a familiar concept to most financial planners, as it is used to determine which receipts are reported as income for income tax purposes and who is to be taxed on that income. Almost all states have adopted one of the versions of the Uniform Principal and Income Act (UPIA). Under UPIA, the trustee has $1,000 of income and $9,000 of principal. This illustrates the basic dilemma of the credit shelter trust as an IRA beneficiary. The IRS position is that when a trust is the IRA beneficiary, both the trust itself and the IRA must qualify. The bottom line is that clients can not have it all.


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