Advanced Underwriting Consultants

Question of the Day – May 17

Ask the Experts!

Here’s the question of the day.

Question:  My client wants to re-title his IRA into the name of his living trust.  Is that a good idea?

Answer:  No, no, no!  It’s a terrible idea.

IRAs must be personally owned to qualify as IRAs.  Any attempt to transfer an IRA to someone else or to a trust will be treated as a complete disposition of the IRA—causing the entire account to be immediately taxable in most cases.  Furthermore, if the original IRA owner is younger than 59 ½, the entire account would also be subject to an extra 10% penalty tax.

This question usually arises when a client has done estate planning documents with an attorney, and has had a living trust drafted.  The attorney advises the client that, in order for the living trust to effectively help the client avoid probate, personally owned assets must be transferred into the trust.

While transferring assets that would otherwise be subject to probate into the trust makes sense, transferring qualified assets does not.  The transfer would be taxable as described above.  Furthermore, it is not necessary to transfer qualified assets into a living trust to avoid probate.  Probate can be avoided by naming a beneficiary for the account.  In fact, if desired, the living trust can be named the beneficiary of the account.  If that’s done, the account will pass smoothly to the living trust at the account owner’s death—without the need for probate.

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