IRAs and Trusts: Ownership vs. Beneficiary Designation | Wolters Kluwer
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  • IRAs and Trusts: Ownership vs. Beneficiary Designation

    DianaTheis Onward

    by Diana Theis, Consultant, Tax Advantaged Accounts, Wolters Kluwer

    Published January 18, 2019



    Overview

    A couple common questions are “Can a trust be the owner of an individual retirement account (IRA)?” and “Can a trust be designated as an IRA beneficiary?” Let’s clear up some confusion regarding IRAs and trusts.

    Can a Trust Own an IRA?

    An IRA cannot be directly owned by a trust. It is an individual retirement account. In addition to a trust not being an individual, the IRA rules require that to make IRA regular contributions an individual must have compensation, and a trust does not have compensation. So without compensation, how can an IRA be funded? An IRA is intended to be used as a way a taxpayer can save for his/her retirement.

    Can an IRA Owner Designate a Trust as an IRA Beneficiary?

    An IRA owner can designate a trust as an IRA beneficiary. As a matter of fact, any person or entity can be designated as the beneficiary of an IRA. Because a trust can inherit an IRA, the trust may become the owner of a “beneficiary IRA”.

    Subsequent to a death the trust has inherited an IRA and is now the account holder. IRS Form 5498, IRA Contribution Information, reporting is done in the name of the trust “as beneficiary of the decedent’s name”. The trust is not allowed to make contributions into the beneficiary IRA. Additionally, all distributions are generally paid directly to the trust and reported in the name and in the tax identification number of the trust.

    Example:

    Nancy Smith, who recently passed away at age 65, had designated her living trust as the sole beneficiary of her IRA. Prairie Bank, the financial organization acting as the custodian of this IRA, reports distributions taken after Nancy’s death as death distributions in the trust’s name and tax identification number. If at the end of any year, including the year of Nancy’s death, there is a balance remaining in the IRA, Prairie Bank reports this balance on a Form 5498 titled similar to “Nancy Smith’s Living Trust, Beneficiary of Nancy Smith’s IRA”. To ensure reporting is done correctly might require the creation of a beneficiary IRA on Prairie Bank’s data system, to which the assets are transferred from Nancy’s IRA.

    Conclusion

    An IRA must be owned by an individual, however an IRA owner can name his/her trust as the beneficiary of his/her IRA. After the death of the IRA owner, an IRA custodian/trustees’ data system may require that a separate account (i.e., beneficiary IRA) be created in the name of the trust “as beneficiary of the decedent’s IRA” to ensure reporting is done timely.

    For an opportunity to learn more about IRAs and other tax advantaged accounts, including Health Savings Accounts and Coverdell Education Savings Accounts, consider joining us for one of our IRA, HSA, or CESA Live Streaming events offered on a variety of topics. For more information call us at 1-800-552-9408.



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