Protecting the Assets in an IRA in Marysville, CA

By putting assets into a trust, people can safeguard them from creditors and reduce estate taxes. However, it may be a bad idea to put an IRA into a trust because of undesirable tax consequences. In this article, learn how to protect assets without increasing tax liability.

Trusts and IRAs

Money in an IRA in Marysville CA area, isn’t taxed while it is in the account. According to IRS rules, only individuals can own IRAs. A married couple can’t have a joint IRA, but spouses can have them separately. On the other hand, a trust can own assets on a beneficiary’s behalf, and those assets are taxable. The grantor of the trust transfers asset ownership and, when that person dies, a trustee continues to administer assets on beneficiaries’ behalf.

Ownership of Assets

The problem with putting IRAs into trusts is that the practice is in conflict with IRS regulations. If a person transfers IRA assets into a trust, the IRS considers it a taxable distribution and all the money in the IRA in Marysville CA is considered ordinary income. If a person is under 59 ½ years old, they will have to pay a 10% penalty for an early distribution. To complicate things further, the IRS considers such funds as no longer part of the IRA, and future earnings are not tax-deferred.

Appointing a Trust as a Beneficiary

People can name trusts as IRA beneficiaries, and the practice doesn’t affect IRA ownership while the person is still alive. Naming a trust as a beneficiary can help manage the distribution of assets to heirs, but any distributions made are taxable. If a person wants to leave an IRA to a spouse, they should make that person the beneficiary. Spouses can roll IRAs over into their own accounts, maintaining the fund’s tax-deferred status.

Under IRS rules, an IRA’s beneficiary must make minimum distributions each year, with scheduling based on that person’s projected lifespan. Distributions are taxed as income in a particular year, and naming a trust as a beneficiary does not change the distribution rules. To remain in compliance, trusts must be set up as conduit trusts, meaning that trustees must make minimum distributions and pass the money on to beneficiaries.