Seemingly everyone has heard of an IRA, but few people know about IRA trusts. Perhaps more people should, for an IRA trust may provide a way to “stretch” IRA assets for decades to benefit multiple generations.
An IRA trust is simply a revocable living trust designed to hold IRA assets. It will continue to house them after your death, but that will not prevent you from distributing those assets to your heirs. This is because an IRA trust also contains one or more sub-trusts, which can be designated and customized for your beneficiaries.1
At your option, these sub-trusts can be made lifetime dynasty trusts (sometimes called generation-skipping trusts). Dynasty trusts are complex, but they can potentially allow your grandchildren and great-grandchildren to receive distributions of IRA assets. The distributions may occur decades from now. That may be exactly what you prefer; you may want to give your IRA assets to your grandkids when they are in their forties instead of their twenties.1,2
Alternately, you can draft the sub-trusts as accumulation trusts or conduit trusts. An accumulation trust accepts the Required Minimum Distributions (RMDs) from the IRA, and the trust may only distribute them to the beneficiary at the discretion of the trustee. A conduit trust can pay out IRA RMDs to the beneficiaries as soon as the trust receives them (and as the trustee permits).1
IRA trusts are designed to guard against two things happening to your IRA assets. If your children or grandchildren just inherit your IRA, they could ask the IRA custodian to pay out its entire balance to them in a lump-sum distribution. That would waste the chance to “stretch” the invested IRA assets. In an IRA trust, a trustee oversees the IRA assets, effectively serving as a barrier to such a decision. In addition, since the IRA assets are parked within a trust, they are out of the reach of “predators and creditors,” ex-spouses, and the courts.1,3
You can also set up an IRA trust sub-trust as a special needs trust to benefit a disabled adult. Funds from a special needs trust may not impact the government assistance that person receives.3
Since an IRA trust is a revocable living trust, you are free to revise its terms at any point before your death (at which time the trust becomes irrevocable).1