Making a Living Trust the Beneficiary of a Roth IRA

After you die, the money in the Roth is not just handed over to your designated beneficiaries. Instead, it is gradually paid out—allowing it to earn and compound interest longer—according to the life expectancy of the oldest heir at the time of your death.

So, if the trust has your two grandchildren as beneficiaries, ages 10 and 11, the yearly amount paid out is determined by dividing the amount in the fund by the years left in the life expectancy of the 11-year-old.

As an example, if there is $100,000 in the Roth at your death and the 11-year-old grandchild has a life expectancy of 85, you divide $100,000 by 74, the 85-year expectancy minus the current age of 11. So the total yearly distribution amount would be $1,351, split between the grandchildren.

Having your living trust as the beneficiary of your Roth IRA can provide income for your heirs and maximize your remaining retirement funds. It is important that you work with an attorney and a tax professional to make sure it makes sense for you and to better understand the tax impact.

What are the pros and cons of naming a trust as an IRA beneficiary?

Naming a trust as your Roth IRA beneficiary isn't the right choice for everyone. Before making this decision, weigh the potential benefits against the drawbacks to determine if it aligns with your estate planning goals.

Advantages of naming a trust

• Control over distributions: You can specify when and how beneficiaries receive funds, which is especially valuable for minor children or beneficiaries who may not manage money wisely.
• Creditor protection: Assets held in certain trusts may be shielded from beneficiaries' creditors, lawsuits, or bankruptcy proceedings.
• Protection from divorcing spouses: Trust assets generally remain separate property and aren't subject to division in a beneficiary's divorce.
• Special needs planning: A properly drafted trust can provide for a disabled beneficiary without disqualifying them from government benefits like Medicaid or SSI.

Disadvantages of naming a trust

• Loss of stretch IRA benefits: Under the SECURE Act, most non-spouse beneficiaries must withdraw all funds within 10 years, reducing the tax-deferral advantage trusts once provided.
• Compressed trust tax rates: If the trust retains income rather than distributing it, it reaches the highest federal tax bracket (37%) at just $15,200 of income in 2024—compared to over $609,000 for individuals.
• Administrative complexity: Trusts require ongoing maintenance, annual tax filings, and potentially professional trustee fees.
• Qualification requirements: The trust must meet specific IRS requirements to be considered a "see-through" or "look-through" trust. If it doesn't qualify, even worse distribution rules may apply.
• Less flexibility: Individual beneficiaries can make their own decisions about disclaimers and distribution timing, while trust beneficiaries are bound by the trust terms you set.

When to choose a trust vs. individual beneficiaries

For many people, naming individuals directly as IRA beneficiaries is simpler, less expensive, and more tax-efficient. This approach typically works best when your beneficiaries are financially responsible adults, you want to minimize administrative costs, and there are no concerns about creditors or family dynamics.

A trust becomes the better choice in specific circumstances where control or protection is needed. Consider a trust if your beneficiaries are minors who can't legally manage inherited assets, if a beneficiary has special needs and receives government benefits, or if you're concerned about a beneficiary's spending habits or substance abuse issues.

Trusts also make sense in complex family situations. For example, if you're in a second marriage and want to ensure your children from your first marriage ultimately receive your IRA assets while still providing for your current spouse, a trust can accomplish this. Similarly, if a beneficiary is going through a divorce or has significant creditor issues, trust protection may be valuable.

For example, if your adult daughter is financially stable with no creditor concerns, naming her directly as beneficiary is likely the better choice. But if your son struggles with spending and you want to ensure his inheritance lasts, a trust that distributes funds gradually may protect him from depleting the account too quickly.

What are the common reasons to avoid naming a trust as a beneficiary

In many situations, the complexity and costs of using a trust outweigh the benefits. For smaller IRAs, the administrative expenses of maintaining a trust—including tax preparation, trustee fees, and legal costs—can consume a significant portion of the account value.

The SECURE Act's 10-year rule has reduced much of the tax-deferral advantage that trusts once provided. If your primary goal was stretching distributions over a beneficiary's lifetime to maximize tax-free growth, that benefit is now largely unavailable for most beneficiaries. Individual beneficiaries still face the same 10-year distribution requirement, but they have more flexibility in timing those distributions.

Improper trust drafting poses another significant risk. If your trust doesn't meet IRS requirements for a designated beneficiary, the IRA may be treated as having no designated beneficiary at all. For inherited Roth IRAs, this could trigger a five-year distribution requirement instead of the 10-year rule, accelerating the timeline and reducing tax-free growth.

For straightforward estates with responsible adult children and no special circumstances, direct beneficiary designations are typically the more efficient choice. Trusts add the most value when there's a genuine need for control, protection, or coordination with other estate planning goals—not as a default strategy.

What are the tax consequences when a trust inherits an IRA

While Roth IRA distributions remain tax-free to beneficiaries, naming a trust as a beneficiary introduces important tax planning considerations you should understand before making this decision.

The tax treatment depends largely on the type of trust you use. A conduit trust (sometimes called a "pass-through trust") requires all IRA distributions to be passed immediately to the trust beneficiaries. Because the beneficiaries receive the income directly, they pay taxes at their individual rates, which is generally more favorable than trust tax rates.

An accumulation trust allows the trustee to retain distributions within the trust rather than passing them to beneficiaries. While this provides more control, it can create a significant tax burden. Trusts reach the highest federal income tax bracket at approximately $15,200 of taxable income in 2024, while individuals don't hit that bracket until their income exceeds $609,000. For traditional IRAs where distributions are taxable, this difference can be substantial.

Your trust must also qualify as a "see-through" or "look-through" trust to receive favorable treatment from the IRS. To qualify, the trust must be valid under state law, become irrevocable upon your death, have identifiable beneficiaries, and provide required documentation to the IRA custodian by October 31 of the year following your death. If the trust fails to meet these requirements, the IRA may be treated as having no designated beneficiary, potentially triggering less favorable distribution rules.

Because of these complexities, coordinating with both an estate planning attorney and a tax professional is essential. They can help you structure the trust properly, choose between conduit and accumulation provisions, and ensure your overall estate plan achieves your goals without creating unintended tax consequences.

How to set up a living trust as a Roth beneficiary

There are two steps you'll need to take to have your Roth pay into a living trust.

• Set up your living trust: This must be done using a formal trust document and in accordance with the laws of your state. The trust must be valid and irrevocable at the time of your death to qualify.
• Designate the trust as beneficiary: Contact your Roth IRA custodian to request a beneficiary designation form. You'll need to provide the trust name, the date it was established, and the trustee's information.

Once you do this, the Roth will automatically be payable to the trust upon your death.

FAQs on naming a trust as a Roth IRA beneficiary

What is a living trust?

A living trust is a legal arrangement you create during your lifetime where you transfer assets into the trust while retaining use of them. After your death, the trust distributes assets to your named beneficiaries without going through probate.

What is the difference between a Roth IRA and a traditional IRA?

A Roth IRA is funded with after-tax dollars, so qualified withdrawals in retirement are tax-free. A traditional IRA is funded with pretax dollars, making contributions potentially tax-deductible but withdrawals taxable as income.

Brette Sember, J.D., contributed to this article.