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Learn How an IRA Inheritance Trust Works for a Non-Spouse

Becoming the beneficiary of an IRA inheritance trust requires knowing some specifics about governing the trust accordingly.

An inheritance can be complicated to understand. There’s a lot more to it than Hollywood might have you believe. It gets seemingly more complicated when you set up an IRA inheritance trust for someone other than a spouse. There are many moving parts, and everything can change depending on what a person inherits and what people have set up ahead of time.

The good news is that one you get beyond the scary legalese, a trust is fairly straightforward for the most part. In relation to an Individual Retirement Account (IRA), there are specific ways that an IRA inheritance trust operates. Everyone involved should be aware of what is happening, though. It’s easy for tension, discomfort, and potential lawsuits to result when not everyone understands the details.


What is an IRA inheritance trust?

Think of a trust as a separate person receiving an inheritance. The difference is they don’t keep the money; they distribute it. Essentially, this is accurate as the trust will take the form of the lawyers controlling it. Still, they only act as the vehicle to carry out the wishes of the individual that created the trust.

The trust distributes the inheritance to the designated beneficiaries according to the terms of the trust, not at the desire of the beneficiary.

Within an IRA, the rules for naming beneficiaries are flexible. The flexibility allows the account owner to name a trust as a beneficiary or even a charity or an estate.

The ultimate function of a trust is to allow the creator of the trust to maintain control over the distributions after their death. A common misunderstanding with trusts is the way they’re taxed. You don’t save on taxes by naming a trust as your IRA beneficiary.

Thus, a trust serves no tax purposes and should only serve personal purposes. In fact, it costs money to form a trust, so it won’t save you any money at all. However, that could be money well spent, as the function of an IRA inheritance trust is to control the distribution of the inheritance.

How does it work for a non-spouse

Spouse or non-spouse isn’t relevant in the case of a trust. The process of distribution functions according to the standards stated by the trust itself. The only people that could change it are those that own or create the trust if it is revocable.

Understand, too, that the beneficiary of the trust won’t receive payments through the IRA because they aren’t the beneficiary of the IRA itself. In this case, the trust is the beneficiary. Instead, the trust will receive only the required minimum distributions (RMD) from the IRA. The IRA will release nothing more than RMDs to the trust. Distributions will then be made from the trust to the beneficiary or beneficiaries according to the standards set out by the trust creator.

There is no way that distributions from the IRA can go directly to the beneficiary of the trust. By law, they must first pass through the trust and abide by the trust standards in the process. These requirements ensure that the wishes of the deceased are upheld in all cases.

How do you plan on distributing your money to your beneficiaries?


Nancy Zambell has spent 30 years educating and helping individual investors navigate the minefields of the financial industry. She has created and/or written numerous investment publications, including UnDiscovered Stocks, UnTapped Opportunities, and Nancy Zambell’s Buried Treasures under $10. Nancy has worked with for many years as an editor and interviewer for their on-site video studios.