Should You Name a Trust as Your IRA Beneficiary?

When it comes to planning what happens with your retirement accounts after you’re gone, the details matter. One decision many people overlook is whether to name a trust as the beneficiary of their IRA. On paper, it sounds simple, but like most things in estate planning, the answer comes with both benefits and trade-offs.

Why People Use Trusts

A trust can act like a traffic cop for your IRA. Instead of money going straight to heirs, the trust controls when and how funds are released. That can be especially helpful in blended families or situations where someone may need a little help managing money responsibly.

Trusts can also shield assets from creditors until distributions are made, meaning your legacy isn’t eaten up by lawsuits, divorces, or other financial troubles. In some cases, they even help protect eligibility for government benefits if one of your heirs has a disability or chronic illness.

And when the trust is set up properly, it may still qualify for the same payout rules individuals get - like the option to spread withdrawals out over 10 years - helping keep taxes from piling up all at once.

The Downsides You Need to Know

Of course, there’s no free lunch. Naming a trust as your IRA beneficiary can create a few headaches:

• Taxes can be steeper. Many trusts hit the top tax bracket quickly and much faster than individuals. That means if the trust holds income instead of passing it through to heirs right away, Uncle Sam could end up with a bigger slice.

• Not all trusts qualify. If your trust doesn’t meet IRS “see-through” rules, you lose the favorable 10-year payout window and may face faster withdrawals with higher taxes.

• Mixed beneficiaries complicate things. If a trust has both eligible and non-eligible beneficiaries, the rules can get murky and sometimes less favorable.

• No spousal rollover. Normally, a surviving spouse can roll an inherited IRA into their own, stretching taxes over their lifetime. With a trust in the middle, that option is usually off the table.

• Custodian restrictions. Even if your trust meets IRS rules, some financial institutions may not allow it to use all the payout options.

Conduit vs. Accumulation Trusts

Here’s where it gets technical but important. A conduit trust passes IRA distributions straight to the heirs right away, while an accumulation trust can hold onto funds and decide later how to dole them out. Each has its own tax rules, pros, and cons. Picking the wrong one can change how long the money lasts—or how much ends up with the IRS instead of your family.

A Practical Example

Imagine someone wants to provide income to a second spouse during their lifetime but make sure the rest eventually goes to children from a first marriage. A trust can make that possible - paying the spouse as long as they’re alive, then sending what’s left to the kids. Without the trust, things may not unfold the way they intended.

Bottom Line

Naming a trust as your IRA beneficiary can be a smart move for control, protection, and peace of mind. But it also adds complexity and potential tax pitfalls. The right answer depends on your family situation, your goals, and how the trust is structured.

Before making a decision, it’s wise to sit down with a fee-only financial planner and an estate planning attorney. Done well, this strategy can protect your loved ones and make sure your wishes are carried out. Done poorly, it can cause unnecessary taxes and headaches.

👉 Ready to take the next step? Book your free discovery call and let’s start the conversation.

John Piershale, CFP®, AEP®

Fee-Only and Fiduciary Advisor

This article is for educational purposes only and is not legal or tax advice. Please consult an attorney or tax advisor regarding your personal situation. John Piershale Wealth Management, LL#C is an Investment Adviser registered with the State of IL and in other jurisdictions where exempt from registration. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.