Please ensure Javascript is enabled for purposes of website accessibility

Your Personal Finance Questions, Answered: Why Is Putting an IRA Into a Trust So Complicated?

By Motley Fool Staff - Feb 5, 2018 at 8:20PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The tax advantages of an Individual Retirement Account aren’t the only things that can get dented by making that move.

At the Motley Fool Answers podcast, we can tell a lot about what's on our listeners' minds by looking into the mailbag, and no surprise, right now, the topic of interest is starting to be taxes. So for this episode, hosts Alison Southwick and Robert Brokamp recruit a special guest to help answer their queries: Megan Brinsfield, head of financial planning for Motley Fool Wealth Management. Taxes, though, are not the only subject of concern this month, but as a CFP and CPA, she's more than qualified to advise our listeners about retirement accounts, 529s, and more.

In this segment, she briefly covers some of the difficulties your heirs might run into if you pass along an IRA through a trust.

A full transcript follows the video.

This video was recorded on Jan. 30, 2018.

Alison Southwick: The next question comes from Bob. "My wife and I are a blended family. We both have separate personal revocable trusts that benefit each other until we're both gone. At that point, all the assets get distributed evenly to the five kids who are now all adults. I remember Bro talking about trusts some time ago, and stating that tax-deferred accounts should not be in them. Could you elaborate on the details about why?" Bro, you're going to have to wait to answer.

Robert Brokamp: Let's get Megan. And feel free, Megan, by the way, to disagree with whatever I said.

Southwick: We're going to get the Megan take.

Megan Brinsfield: I can't wait.

Southwick: Here comes the hot Megan take.

Brinsfield: Coming to you live. The trust receiving an IRA type account is a complex area, so it's not necessarily yes, you should definitely do it or no, definitely don't do it. Just know that if you decide to name a trust as a beneficiary of an IRA, things get complicated really quickly.

One of the biggest benefits of an IRA is being able to stretch out those required minimum distributions when the ultimate beneficiaries receive it, and sometimes if you don't do everything right inside a trust, you mess up the ability to stretch it out. You have to take all the distributions within five years, and inside a trust you're hitting the highest income bracket at $12,500 of income, as opposed to an individual, who hits the highest bracket at $500,000 of income.

You definitely want to be very careful, especially if you have charitable beneficiaries. It doesn't sound like Bob is in that situation. But we generally recommend trust as a beneficiary for people who are more concerned about the beneficiary's ultimate financial situation. If they're not particularly responsible with money, or maybe subject to making poor marital decisions, those could be good candidates for setting up a trust as a beneficiary.

Brokamp: I'll agree with Megan on that. It's really not a black and white thing. If you were to research it, the majority of people would say it's too complicated and it's unnecessary, but in the situations that Megan highlighted, a trust is a great way to pass on wealth to people who may not be ready to handle it well.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.