I've heard conflicting information on how minor children should be listed as beneficiaries of an IRA. (And perhaps for life insurance.) This is where there is a testamentary trust to provide for the child in the case of the death of both parents.

One school of thought says to use the child's name directly.

The other way is to make the trust the beneficiary. (We can assume that the trust meets the requirements on page 36 of IRS Pub 590 so that the children are treated as designated beneficiaries.)

Which way is better (and what does "better" mean)? Does it depend on state law, or the terms of the trust? Are there trade-offs to either approach?

(Yes, I'll be asking the lawyer, but I'd like to educate myself about this choice before I get there -- so bonus points for good references...)

3 Answers 3


First - for anyone else reading - An IRA that has no beneficiary listed on the account itself passes through the will, and this eliminates the opportunity to take withdrawals over the beneficiaries' lifetimes. There's a five year distribution requirement. Also, with a proper beneficiary set up on the IRA account the will does not apply to the IRA. An IRA with me as sole beneficiary regardless of the will saying "all my assets I leave to the ASPCA." This is also a warning to keep that beneficiary current. It's possible that one's ex-spouse is still on IRA or 401(k) accounts as beneficiary and new spouse is in for a surprise when hubby/wife passes. Sorry for the tangent, but this is all important to know.

The funneling of a beneficiary IRA through a trust is not for amateurs. If set up incorrectly, the trust will not allow the stretch/lifetime withdrawals, but will result in a broken IRA. Trusts are not cheap, nor would I have any faith in any attorney setting it up. I would only use an attorney who specializes in Trusts and Estate planning. As littleadv suggested, they don't have to be minors. It turns out that the expense to set up the trust ($1K-2K depending on location) can help keep your adult child from blowing through a huge IRA quickly. I'd suggest that the trust distribute the RMDs in early years, and a higher amount, say 10% in years to follow, unless you want it to go just RMD for its entire life. Or greater flexibility releasing larger amounts based on life events. The tough part of that is you need a trustee who is willing to handle this and will do it at a low cost.

If you go with Child's name only, I don't know many 18/21 year old kids who would either understand the RMD rules on IRAs or be willing to use the money over decades instead of blowing it.

Edit - A WSJ article Inherited IRAs: a Sweet Deal and my own On my Death, Please, Take a Breath, an article that suggests for even an adult, education on how RMDs work is a great idea.

  • Thanks for the warning; I've been having the same thoughts -- and I'm certainly not going to attempt to set it up myself! FWIW, I don't know many 35, 50, or 65 year olds who understand the RMD rules on IRAs...
    – bstpierre
    Apr 13, 2012 at 18:33
  • @bstpierre - as a part time finance blogger, I am appalled at the lack of expertise by the actual professionals when it comes to IRAs and specifically the rules of inheritance. Apr 13, 2012 at 19:21
  • True, but I'm not actually surprised that a typical lawyer is ignorant of the rules. They are incredibly complex.
    – bstpierre
    Apr 14, 2012 at 22:53
  • 3
    Elsewhere I am helping someone with an IRA question, her CPA told her to consult a Tax Autorney, the Tax Attorney said she needs a CPA, and the IRA custodian says they cannot offer any advice at all. I respect lawyers, but only those who are expert at their chosen focus. Apr 14, 2012 at 23:23

I think that "better" is up to a discussion, but the difference is that while in trust you can control the money after your death in some way - giving it directly to children means you have no such control.

I.e.: in trust you can stipulate that the children will be able to spend the money under certain terms or in certain ways (for example - for college, only after getting married, no more than 10% of the value a year, etc), giving their names as the beneficiaries means that they get the money and can do with it whatever they please.

BTW: "Minor" has nothing to do with it. They don't have to be minors, or your children at all.

  • 1
    I understand the answer you've given, but "minor" is actually the crux of the question. If the minor child is the designated beneficiary (not the trust), then does the guardian have control over those assets until the child reaches majority? (Versus the trustee, if the guardian and trustee are different people.) As I understand it, IRA custodians will not deal with a minor; the minor does not have the legal capacity to deal with the IRA.
    – bstpierre
    Apr 13, 2012 at 18:22
  • @bstpierre I didn't understand that your question was "guardian vs trustee". For minors it depends on the state laws, as they cannot enter contract. However, guardian can do anything he wants, as long as its considered to be for the benefit of the child, while the trust does what you prescribe it to do.
    – littleadv
    Apr 13, 2012 at 18:24

I would like to bring up some slightly different points than the ones raised in the excellent answers from JoeTaxpayer and littleadv.

  • The estate can be the beneficiary of an IRA -- indeed, as has been pointed out, this is the default beneficiary if the owner does not specify a beneficiary -- but a testamentary trust cannot be the designated beneficiary of an IRA. A testamentary trust that meets the requirements laid out on page 36 of Publication 590 is essentially a pass-through entity that takes distributions from the IRA and passes them on to the beneficiaries.

  • For the case being considered here of minor beneficiaries, the distributions from the IRA that pass through the trust must be sent to the legal guardians (or other custodians) of the minors' UTMA accounts, and said guardians must invest these sums for the benefit of the minors and hand the monies over when the minors reach adulthood. Minors are not responsible for their support, and so these monies cannot be used by the legal guardian for oaying the minors' living expenses except as provided for in the UTMA regulations. When the minors become adults, they get all the accumulated value on their UTMA accounts, and can start taking the RMDs personally after that, and blowing them on motorcycles if they wish. Thus, the advantage of the testamentary trust is essentially that it lets the trustee of the trust to decide how much money (over and above the RMD) gets distributed each year. The minors and soon-to-be young adults cannot take the entire IRA in a lump sum etc but must abide by the testamentary trustee's ideas of whether extra money (over and above the RMD) should be taken out in any given year. How much discretion is allowed to the trustee is also something to be thought through carefully. But at least the RMD must be taken from the IRA and distributed to the minors' UTMA accounts (or to the persons as they reach adulthood) each year.

  • Regardless of whether the Traditional IRA goes to beneficiaries directly or through a testamentary trust, its value (as of the date of death) is still included in the estate, and estate tax might be due. However, beneficiaries can deduct the portion of estate tax paid by the estate from the income tax that they have to pay on the IRA withdrawals.

Estate planning is very tricky business, and even lawyers very competent in estate and trust issues fall far short in their understanding of tax law, especially income tax law.

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