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Living trusts can be amended to include provisions to receive the IRA funds.  However, due to the complex rules and strategies in this area, many advisors such as renowned IRA expert, Ed Slott, believe a standalone retirement distribution trust is far preferable to a living trust as beneficiary of retirement assets. The reasons for this include:

  • Easier to Manage and Less IRS Scrutiny.  Trusts as beneficiaries of IRAs can be very complicated.  If not done properly, immediate income tax consequences could result.  Your trustee will have an easier time complying with the stretch out rules (and more importantly, the IRS will have an easier time vetting that the rules have been complied with) if the trust which receives it is structured with the sole purpose of complying with the IRS requirements for IRA benefits in trusts. 
  • Creditor Protection.  Your living trust will receive both IRA and non-IRA assets such as bank accounts, real estate.  If your living trust includes specific provisions which attempt to curtail the payout of assets to beneficiaries such as spendthrift clauses, no-contest clauses, incentive/disincentive provisions etc., these provisions can be problematical for trusts designed to hold retirement benefits (especially “conduit” trusts).  Such restrictions on creditor protection are more easily avoided in a trust dedicated solely to receiving retirement distributions. 
  • Standard Living Trust Provisions Can Jeopardize Payout.  Many living trusts include provisions that will disqualify it as a designated beneficiary trust, such that the beneficiaries will not be able to use their own life expectancy for calculating RMDs and may be forced to use a life expectancy as short as 5 years. These provisions include but are not limited to payment of debts, expenses and taxes, accounting for principal and income.
  • Greater Flexibility.  Naming a charity, other non-individual beneficiaries, or even naming older contingent beneficiaries (“if my son dies, his share of the IRA benefits will go to his children” – here the grandchildren are “contingent beneficiaries”) can adversely affect the ability of the IRA to be preserved and stretched out.  If one or more of these beneficiaries is named in your plan, it is best that the IRA be placed in a standalone trust so as to not inadvertently destroy the stretch out.  IRS Private Letter Ruling  201021038 shows how the typical provisions of a family revocable trust, inserted to obtain maximum flexibility, can defeat the Participant’s goal to stretch the IRA. 
  • Easier to Amend if Law Changes.  If there are later changes in the law, it will be easier to make amendments if the benefits are payable to the standalone IRA which has a specifically stated purpose and special treatment.  California law allows for the amendment of trusts where the purpose of the trust could be defeated or impaired.  The clear labeling and stated purpose as stated in the trust will allow to court to do so.
  • Less Complication for the Living Trust.  Depending on what type of IRA trust you wish to set up  - a “conduit” trust or an “accumulation”, special language will have to be added to the living trust which, once again, will complicate matters for both the trustee and custodian of the plan.
  • Less Chance of Rash (and Costly) Decisions By Children.  Having the IRAs in a standalone trust will make it less likely that the trustee and/or beneficiaries may be impulsive and request an immediate payment of their IRAs from the IRA custodian (and thus lose the tax deferral/asset protection benefit of the IRA).  It will also make it be less likely that a later trustee (or his/her attorney if not experienced enough in this field) will make a mistake that may have adverse tax consequences.

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