What is an IRA Trust?

Jim B.

An IRA trust is a method of leaving behind the wealth in an individual retirement account, or IRA, which serves the purpose of protecting the wealth of the account for the beneficiaries of the trust. Instead of leaving the assets of an IRA to a person like a child or grandchild, an IRA trust would establish a trust for the wealth and then establish beneficiaries for that trust.

The beneficiaries of an IRA trust must be identifiable, and the trust must be irrevocable at the grantor's death.
The beneficiaries of an IRA trust must be identifiable, and the trust must be irrevocable at the grantor's death.

By doing this, the grantor of the trust helps to establish that the IRA's assets are protected from any financial distress that may befall the beneficiaries. Other benefits of this arrangement include the ability of the trust grantor to control the manner and timing of the distribution of wealth and the opportunity for the grantor to set aside a portion of the trust to pay estate taxes.

An IRA Trust allows retirees to stipulate the distribution of wealth that is protected from beneficiaries' unforeseen circumstances or debts.
An IRA Trust allows retirees to stipulate the distribution of wealth that is protected from beneficiaries' unforeseen circumstances or debts.

By establishing an IRA trust to receive the assets of an individual retirement account, an individual can better control the distribution of the wealth within and help that wealth survive any unforeseen circumstances that may affect the family descendants or other people named as beneficiaries. The trust itself would be the direct beneficiary instead of a person, but then the grantor can name individuals like children or grandchildren to benefit from the trust account. For the IRA trust to be legal it must be a valid trust by state laws, the beneficiaries of the trust must be identifiable, and the trust must be irrevocable at the grantor's death.

Once the trust is established, the assets of the IRA are doled out to the trust beneficiaries as stipulated by the grantor. This means that the wealth is protected from any debts amassed by the beneficiaries, because the trust itself is the direct beneficiary. For example, the son of the grantor going through a costly divorce could use his stipulated portion of the trust to help pay the ex-spouse, but he couldn't liquidate the assets of the trust.

With these same safeguards in place, a trust beneficiary who was fiscally irresponsible couldn't get his or her hands on the bulk of the trust and thereby deplete the funds of the original IRA. The trust also allows the grantor the leverage to decide how the funds are eventually distributed. For example, the grantor can make sure that the original beneficiaries are his children, and then, upon the children's eventual death, the trust can assign the grandchildren as trust beneficiaries rather than surviving spouses of the children.

One of the other advantages of an IRA trust is that it can be set up to assure that estate taxed are paid. The financial difficulties of beneficiaries might make it difficult for them to pay the taxes on a wealthy estate. An IRA trust can assign a certain amount to be put in escrow for the sole purpose of paying those taxes.

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