IRA Ownership

• As the name would suggest, only an individual can own an IRA. If you transfer your IRA's assets to a trust while you are alive, the Internal Revenue Service immediately considers its tax-advantaged status null and void. Therefore, if you have a traditional, SIMPLE or SEP IRA, the entire amount is subject to income taxes. Furthermore, you may owe a 10 percent early withdrawal penalty if you transfer any type of IRA to a trust before the year you turn 59-1/2.
  
  

IRA Beneficiaries

• When planning your estate, you can name one or more heirs to inherit your IRA when you die. Or, you can arrange for IRA withdrawals to pass through a trust, which will then distribute the money to your heirs. In order to do this, a trust must be valid under state law; the trust's beneficiaries must be individuals; and it must be irrevocable, if not while you are alive, then immediately after your death.
  
  

Required Minimum Distributions

• All IRA beneficiaries, individuals and trusts, are required to take required minimum distributions, or RMDs, beginning the year after the original owner's death. The Internal Revenue Service calculates RMDs by dividing an IRA's worth by the life expectancy of the beneficiary. RMDs are one of the benefits of IRAs as estate-planning tools. Rather than close the account, and therefore expose its assets to taxation, heirs can continue making small withdrawals over their lifetimes to extend the account's tax benefit.
  
  

Trust Beneficiaries

• Ordinary IRA beneficiaries have the option of taking a lump-sum withdrawal rather than RMDs over their lifetime. If you are worried that your heirs might do this, either because they have a history of overspending or because they might loose the IRA in a divorce settlement, you can essentially "lock" the IRA in a trust. The trust language could stipulate that its beneficiary is to receive no more than the annual RMD. You can also use a trust to protect wealth for children or a disabled person.
  
  

Considerations

• If you have no reason to believe that your heirs will handle an IRA unwisely, placing it in a trust is probably an unnecessary step. IRAs are a non-probate asset, meaning they wind up directly in the hands of your heirs after your death. Furthermore, if you name your spouse as the sole beneficiary of your IRA, she has the option to treat it as her own. This allows her to delay RMDs indefinitely if she inherits a Roth IRA, and until she is 70-1/2 if she inherits a traditional, SEP or SIMPLE IRA. If the IRA is in a trust, she does not have this option.