You start saving for retirement to take care of yourself, right? You want to be sure that you and your spouse can lead a safe and comfortable lifestyle during your retirement years, so you set up a self-directed IRA and make regular contributions to it.
But at the core of all saving and investment there’s likely to be something more. After all, most people tend to keep saving and investing even after they’ve got enough to take care of themselves. We often tend to continue making these savings and investment choices because we’re thinking beyond ourselves and our spouses. We believe that with our saving we can benefit our children and our grandchildren, and help to improve their lives.
One technique that some individuals use is to name a trust as the beneficiary of their self-directed IRA. The rationale, particularly if they’ve already created the trust for other reasons, is that a trust beneficiary will give them greater control over their estate planning. Here are some considerations for appointing a trust as the beneficiary of your self-directed IRA.
Make Sure You Have a Good Reason. Naming a trust as a beneficiary will invariably involve more paperwork and planning than simply naming the individuals that you want to benefit. In order to make this worthwhile, you want to be sure that you have a good reason for involving a trust in the handling and administration of your self-directed IRA assets.
One common reason to name a trust as your beneficiary is if you don’t want your children or grandchildren to have immediate access to the full amount of your bequest. Trusts can be set up to make periodic payments to the individuals you name, or to make payments for certain purposes (such as college expenses, for example), so that the assets you’ve accumulated will not be spent too quickly.
Spousal Beneficiaries. The spousal rollover provisions for IRAs are very powerful, and the benefits are might outweigh anything you may be able to gain from having your spouse benefit from a trust that’s the beneficiary of your self-directed IRA. Speak with your advisor to weigh the pros and cons of each approach.
The Trust Beneficiaries. Avoid the temptation to make your structure overly complicated. For example, the beneficiaries of your trust should be individuals, and not additional trusts or charities. For example, any structure that has the effect of completely avoiding taxes that would otherwise be due is likely to draw examination from the IRA.
Furthermore, if there are a number of different children and grandchildren that you wish to help, consider setting up separate trusts for each individual. You may also wish to divide your self-directed IRA into multiple accounts in order to feed into each of these trusts. The costs can be a disincentive for some, but don’t be tempted to try to cut corners. Getting something wrong can have immediate and significant negative tax implications.