11 Mar What happens to my IRA when I die under this trust?

Q. Should my wife predecease me, my traditional IRA will go to my two sons 50-50, as specified in my will. A trust has been established for this purpose. The will stipulates that at age 32, half of the IRA assets will become available for them and at 35, the remaining half will be available. My question is: When, after I am deceased, will my IRA need to be rolled over into an inherited IRA? Is this to be done right away, or when my sons take control of the assets?
— Planning

A. It takes a fair amount of planning if you have specific goals for your money after you die.

Your plans need to take into account how certain items are treated by law.

Normally a traditional IRA is a non-probate asset that passes directly to the named beneficiaries rather than via the will, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

Based on the way you asked your question, Maye said it looks like you worked with an attorney to create a will that includes a “testamentary” post-mortem trust that is the named beneficiary on your IRA.

“The inherited IRA would need to be established upon the original IRA account holder’s death,” Maye said. “Any Required Minimum Distributions (RMDs) from the inherited IRA which were not taken by the decedent first would flow into the trust.”

Distributions made from the trust to the trust beneficiaries would be governed by the type of trust established in the will, Maye said.

For example, with a conduit trust, the RMDs are required to be passed along to the beneficiaries as they are received, while with an accumulation trust, the inherited IRA RMDs can be accumulated rather than immediately distributed to the beneficiaries.

“One thing to keep in mind if using an accumulation trust is that trusts have very compressed tax brackets, hitting the highest marginal rate of 37% very quickly, which may not be ideal,” Maye said.

He noted there are varying reasons to set-up a trust as an IRA beneficiary, such as for a special needs child who might lose government benefits if they owned the IRA outright, or for creditor protection, or there could be other reasons for the trust.

“This can be complex and highly recommend anyone thinking or planning on doing this to seek the help of a qualified estate planning attorney,”

Maye said. “In my opinion this is not a ‘DIY’ to take on without professional help.”

You should sit down with the attorney who drafted your documents. They can explain to you exactly how it was set up and go over whether it will accomplish your goals.

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This story was originally published in March 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.