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An option: Use trust as your IRA beneficiary

Your living trust can be the beneficiary of your IRA or qualified retirement plan -- 401(k), 403(b), 457, and others -- but professional advice and assistance is required.

For simplicity, I will call them tax-deferred assets. Even though you can name your living trust as beneficiary of tax-deferred assets, that may or may not be the wise thing to do in your particular situation.

Death (estate) taxes. Avoiding death taxes (also known as "estate taxes") is a good reason to name the trust as beneficiary. When you die, the federal government imposes a tax on the value of your estate.

If your home, bank accounts, investments, life insurance (death benefit plus cash value), personal effects and "tax-deferred assets" total more than $650,000 (1999 exemption amount), the excess will be taxed at rates from 37 percent to 55 percent!

So, if you die in 1999, and your assets total $800,000, the estate taxes on the $150,000 excess will be well over $50,000! The taxes will have to be paid by your family, and they are due nine months after death.

If you are married, and you leave all of your assets to your surviving spouse, the taxes will be deferred until your spouse's death. If the surviving spouse dies shortly after you do, there may not be time to do the necessary tax planning.

Possible solution? Title your assets into the name of the living trust and name the trust as beneficiary of your "tax-deferred assets." The IRS permits a qualified trust to be the beneficiary, and the income tax-deferral opportunities that are available to a surviving spouse (or children) are available to the qualifying trust. Many rules apply, so this should not be done without professional assistance, but it can be a valuable method of saving estate taxes.

Income taxes. While the IRS permits you to "shelter" your "tax-deferred assets" from death (or estate) taxes in the manner explained above, the IRAs at many financial institutions run afoul of that benefit by requiring a one- to five-year mandatory withdrawal of all IRA money if you use a trust as beneficiary.

For once, the IRS is not the bad guy, it is the financial institution that has decided to trigger the rapid payout, which means that your heirs lose the opportunity to defer income taxes on IRA funds.

If you are interested in using a living trust to protect your IRA from estate taxes, you ought to check with your financial institution to see if they support your desire.

If your institution requires a one- to five-year mandatory withdrawal, you may want to consider moving your money to an institution that allows a withdrawal schedule calculated according to the joint life expectancy of you and the oldest beneficiary of your living trust. That could be 15 years or more.

Undesired distributions. In some families, it may not be desirable to name the spouse as the beneficiary of "tax-deferred assets." Whether intentional or unintentional, the surviving spouse may end up leaving the deceased spouse's "tax-deferred assets" to a new husband or wife, rather than to the decedent's children. If the living trust is the beneficiary, that problem may be avoided.

Loss of other protections. Some families have children who present special concerns for parents. Again, it may not be prudent to name the surviving spouse as beneficiary of tax-deferred assets because it is unknown what will happen to the surviving spouse. An unexpected death of the survivor could result in the assets going directly to adult children who are not mature or experienced enough to handle an inheritance.

If there are minor children, a probate court will have to be called on to protect the money for the minor children, but the protections will be those imposed by the court, not those desired by the parents. What if a child has special health needs and is eligible for government programs and financial assistance? Without proper planning, that eligibility can be lost when the child inherits your assets.

Lawsuit protections. If your tax-deferred assets are properly positioned in a living trust, those assets will be exempt from claims that may be brought against your children (lawsuits, divorces, bankruptcies, etc.) before or after you die.

These matters require the utmost in professional analysis and counsel. Do not name your living trust as beneficiary of your IRA or other "tax-deferred assets" without having a careful consultation with your estate-planning professional.

If you would like to receive a free report that discusses this topic in greater depth, please contact us and we will mail you a copy.

Randall J Holmgren is an attorney in the Salt Lake law firm of Holmgren & Mitton, L.C. He may be contacted at 801-366-9966 or by e-mail at or visit his firm's Web site at Also contact Holmgren if you have a question or issue you would like to see addressed in an upcoming column. Any statement made in this article is intended for general information purposes only and should not be relied upon as a legal opinion or advice. For legal advice or an opinion, discuss the facts of your specific circumstances with a qualified legal professional.