Leaving an IRA to a trust is often viewed as a smart estate planning move. But while it can provide control and protection, it can also create higher taxes and added complexity.The decision has taken on added urgency in recent years as changes under the SECURE Act reshaped distribution rules for inherited retirement accounts. In this episode of Focus on Finance Forum, Jeffery Levine, chief planning officer of Focus Partners Wealth, explains how naming a trust as an IRA beneficiary can create competing priorities for households. Levine breaks down the rules and outlines what you need to know to avoid costly mistakes.Leaving an IRA to a trust: Who pays the taxes?Jeff Levine: All right, back to the Focus on Finance Forum, your place to ask questions and stay up to date on the latest in personal finance. I’m Jeff Levine, joined by my good friend Bob “Mr. Retirement” Powell. Great to see you again.Robert Powell: Professor Jeff, great to see you as well.Jeff Levine: We’re back in the classroom today with more questions. Here’s one I get often: “If I leave my IRA to a trust, which is my plan, who is going to pay the taxes on my IRA distributions?”Before we get into the mechanics, Bob, do you find readers are thinking more about leaving IRAs to trusts? Robert Powell: I do get that question. I’m often reminded of those beneficiary flow charts. They’re already complicated, and adding a trust makes them even more overwhelming.Trusts and IRAs: complexity squaredJeff Levine: Exactly. IRA rules are complicated. Trusts are complicated. Put them together and it’s not a simplification, it’s a multiplier.A lot of people think naming a trust as beneficiary will save taxes. But while trusts can provide many benefits, tax savings is generally not one of them. In fact, a trust can accelerate taxes.Here’s how it works. When someone dies and names a trust as beneficiary, the trust establishes an inherited IRA, just like an individual would. The difference comes next. Distributions flow from the inherited IRA to the trust, and then possibly to the trust beneficiaries.What happens depends on the trust terms and, in some cases, the trustee’s discretion.Control vs. accessIf distributions stay inside the trust, those assets are typically well protected. They may be shielded from creditors, divorce, or even the beneficiary’s own decisions. That provides control.But if the funds are distributed out of the trust, the beneficiary gains access and can use the money freely. Once it’s out, it’s out.The tax issue: trust vs. individual ratesThis is where things become critical.If the money stays in the trust through year-end, the trust pays taxes at trust tax rates. Those rates reach the top bracket, currently 37%, at about $16,000 of income.By contrast, if the trust distributes the money to beneficiaries, they pay tax at their individual rates. Most individuals are not in the top bracket.So distributing funds can be more tax-efficient. But doing so reduces control.When does a trust make sense?Robert Powell: What about situations with minors?Jeff Levine: That’s one of the most common use cases. For larger accounts, a trust can help manage distributions until a child is older.But situations change. A trust created for one purpose, like protecting assets during a divorce, may no longer be necessary years later. That’s why plans should be revisited.Ultimately, deciding whether to name a trust as beneficiary requires input from an estate attorney, tax advisor, and financial planner.The core tradeoffAt its simplest, the decision comes down to two competing priorities.Control: Limiting access, protecting assets, guiding how funds are usedCost and complexity: Higher taxes, additional fees and administrative burdenIn some cases, such as special needs planning, control may outweigh everything else. In others, minimizing taxes and complexity may take priority.Distribution rules: even more complexityRobert Powell: What about distribution rules for trusts?Jeff Levine: It depends. The first step is determining whether the trust qualifies as a “see-through” trust. That allows it to be treated as a designated beneficiary.If it doesn’t qualify, the rules can be more restrictive, sometimes requiring full distribution within five years.If it does qualify, then you still need to determine whether it’s treated as an eligible or non-eligible designated beneficiary under the SECURE Act framework.From there, distribution options can include:Stretch distributions in limited casesThe 10-year ruleThe five-year ruleDistributions based on the deceased owner’s life expectancyThere are multiple possible paths, and determining the correct one requires careful analysis.Final thoughtsJeff Levine: This is not something to handle without professional guidance. It requires coordination among your estate planner, tax advisor, and financial planner.If you’re considering naming a trust as your IRA beneficiary, get expert help to ensure the structure meets your goals while minimizing unintended tax consequences.Robert Powell: I trust we’ve helped provide at least a working understanding.Email questions to FocusOnFinance@FinStream.tv.Related: Living trusts: what they do and who needs one
Should you leave your IRA to a trust? What to know
