Why You Should Consider A Look Through Trust for Your IRA

Many people believe that it isn’t possible to leave your IRA proceeds to your trust. This is usually correct, however setting up your IRA beneficiary designation and trust properly can allow you to enjoy the benefits of greater control and tax deferral after you pass.

 

Why Would You Want to Leave Your IRA Proceeds to a Trust?

Well, first off if you have minor children they can’t legally take control of an inheritance until they are age 18. That means that you would need to leave the money to a guardian or trust until the child turns 18. At 18, if there isn’t a trust they could get access to any remaining assets.

More commonly, a trust is used for creditor protection. An inherited traditional or Roth IRA is not protected by federal bankruptcy proceedings. A trust can insulate your assets from being attached to a bankruptcy or lawsuit. In this blog you’ll learn what a look through trust is, what is needed to set it up and how to use it in your estate plan.

 

What Is A Look Through Trust?

look through trust for ira

A look through trust can allow you to have greater control over your IRA assets once you pass. Your trust document can specify who gets funds, when, on which terms and how the money should be invested.

A look through trust isn’t a special type of trust. Instead, it is a way of setting up your IRA’s beneficiary designation that allows the tax law to look through your trust to see that the trust beneficiary is a real person. By setting up your beneficiary designation this way you can allow for your IRA proceeds to remain in an IRA, but still have greater control over the assets after you pass.

If you leave the assets to a designated beneficiary using your IRA’s beneficiary form, the assets will pass directly to the beneficiary when you die. Transferring assets via beneficiary designation doesn’t leave you with control of how and when the beneficiary would receive the money. Often the beneficiary chooses to withdraw the full amount as a lump sum. This results in high taxes and often the purchases of items like new cars, vacations, hot tubs and other items that don’t build wealth.

If the beneficiary receives a large lump sum they would then be tasked with personally deciding how much to take out of the IRA and when. Given the option, many people will take the entire IRA balance in a single distribution, thus losing the tax deferral offered by the IRA and potentially paying a high tax bill.

Your lawyer can help you design your trust to fit your goals and wishes while staying compliant with state laws.

Case Study 1:

Both John and Mary have saved a large portion of their net worth in their IRA. They’d like to allow their kids to receive enough money to live a similar lifestyle if they are not around. In addition to lifestyle expenses, they would like to provide $50k per year for college expenses and a $50k down payment at age 30.

They work with their attorney to draft their distribution instructions according to their wishes. The trust beneficiaries are John and Mary’s children. By providing a copy of the trust document to the IRA custodian they can ensure that their plans are executed properly and their kids are taken care of.

 

How Do I Set Up a Look Through Trust?

In order to have a valid look through trust you must have the following:

  • A valid trust in the state that you reside
  • The beneficiary must be a living person (no charity or non-profit can be the beneficiary)
  • The trust must be irrevocable or become irrevocable upon the death of the owner (so that its terms cannot be changed or cancelled)
  • Your IRA custodian must have a copy of your trust document on file
  • The key factor in setting up the look through trust is your trust itself.

Typically by working with your financial planner and your estate planning attorney you will be able to answer important questions like:

  • Who should get the money and on what terms?
  • How should the money be invested?
  • Who should be responsible for monitoring performance and making changes?
  • What to do in special circumstances if more money is needed than expected?
  • How to avoid the beneficiary becoming too dependent on the trust income

No trust document can be absolute in covering all of the potential scenarios and what ifs. That’s why it’s important to work with experienced estate planning attorneys and financial planners who can guide you to help develop your trust as a tool that will preserve your wealth and provide for your family. This is especially important if you have children with different maturities, financial responsibility or illiquid assets that will require special attention (such as real estate).

 

How To Use A Look Through Trust In Your Estate Plan

One of the smartest financial moves when entering into retirement is to transfer your assets from your employer’s 401(k) or retirement plan into an IRA. Doing so typically will offer greater control over your investments, potentially lower investment fees and better asset management. When this transfer occurs you will be tasked with choosing a primary and contingent beneficiary. This decision provides an opportunity for you to plan for your family’s financial security and your potential legacy.

One way to set up your IRA beneficiary may be to make your spouse the primary beneficiary and your trust the contingent beneficiary. This would ensure that your spouse has the resources to maintain their lifestyle and provide the framework for caring for your family if you and your spouse are deceased. Given the number of variables and special circumstances for each individual, their family and personal beliefs around money it’s helpful to work with a team of professionals who can answer all of your what ifs.

The big opportunity offered by using a look through trust is the tax deferral of assets. By sheltering assets in a tax deferred account you can potentially extend the longevity. This can be particularly significant if you have a larger sum saved in your IRA or if you will pass assets in addition to your IRA.

Consult with a professional for advice specific to your situation.


About the Author:

Nathan Garcia, CFPNathan Garcia is a Certified Financial Planner at Strategic Wealth Partners. He specializes in the wealth management and financial planning needs of retirees and has helped numerous retirees increase their income, develop their investment plans, and maximize their Social Security benefits. As a well-known financial commentator, he has appeared in Barron’s, the New York Times, and Investors Business Daily to discuss topics related to retirement. Nathan has also been interviewed for different industry specific publications and radio shows to share his take on a variety of issues.

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