WHAT YOU NEED TO KNOW ABOUT IRA TRUSTS IN OHIO
July 5, 2022
For many an individual retirement account (IRA) is not only a form of retirement savings but also a way to provide for loved ones after they have passed. All IRA owners should name a beneficiary for their account, as not doing so can cause issues after the owner has passed. If there is not a beneficiary named, the IRA is subject to the probate process and the funds may be immediately subject to income tax. If there is a beneficiary named, they inherit the IRA and have no limitations regarding how to spend the money.
That is, unless the owner indicates otherwise in their estate planning documents.
IRA owners may want to dictate when beneficiaries can access the IRA and how they can use the money. To do so, owners will need to name a trust as the beneficiary and create an IRA trust.
THE BASICS OF AN IRA
Individual retirement accounts were created in 1974 under the Employee Retirement Income Security Act (ERISA). The intention was to provide workers another way to save for retirement since at the time many employers could not afford pension plans. There are different variations of an IRA such as traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.
An IRA can only have one owner. In order to make contributions to the account certain criteria must be met. The owner must have a taxable income and cannot contribute more than $6,000 a year if they are under the age of 50. IRA funds cannot be accessed by their owner until they are 59 ½, at least not without tax penalties. If funds are accessed before then the owner is subject to a 10% tax penalty.
ADVANTAGES OF AN IRA TRUST
IRAs are many people’s primary asset and trusts are amazing estate planning tools. When the two are put together they become a great way to provide for loved ones. Naming a trust as a beneficiary on an IRA can provide a wealth of advantages for an IRA owner and their loved ones. Here are just a few of the potential advantages:
Having control over beneficiary spending: A beneficiary may want to take all of the money out at once and spend it on frivolous things. An IRA trust gives the owner the ability to dictate how much a beneficiary can take out at a time and what they can spend it on. An IRA trust ensures that the money will be used responsibly.
IRA trusts are protected: As long as the funds of an IRA trust remain in the trust, creditors, lawsuits, and spiteful ex-spouses cannot reach the funds. An inherited IRA has no such protections.
Provide for different family structures: An IRA trust gives the owner the ability to account for different family structures such as second marriages. Without an IRA trust, the funds could go to a new spouse instead of children from a previous marriage.
“PASS-THROUGH” TRUST RULES
If not done correctly, by naming a trust as the beneficiary of an IRA you are naming a non-individual to inherit that asset. This will subject the beneficiary to accelerated withdrawal requirements and “pass-through” rules. Pass-through dictates that the IRA must be completely withdrawn within five years of the original owner’s death. There is an exception that allows beneficiaries 10 years to withdraw the IRA if the beneficiary is a surviving spouse, disabled, chronically ill, a minor, or no more than 10 years younger than the owner. However, a properly designed IRA Trust avoids these issues and are a powerful tool to protect your transferred wealth. Trusts are a great way to streamline your estate plan and an IRA trust can help you provide for your loved one's future. If you are the owner of an IRA consult one of our estate planning attorneys to see if an IRA trust may be right for you. Call us today at 614-389-9711.
Want to learn more about trusts? Check out our Consumer’s Guide to Estate Planning in Ohio.