As you may be aware, if your child inherits your IRA, he can “stretch” out the withdrawals in order to continue the deferred tax growth for a number of years. Naming your child a beneficiary of your IRA can be a problem if: (1) your child is a minor and you don’t want him to inherit a large amount upon turning 18 (the legal age of majority in Oregon); or (2) your child has creditor problems (or may have creditor problems in the future). Most people are unaware that if you have one or both of the above mentioned problems, you can still have your IRA pay into a special kind of trust (called a “See Through Trust”), and limit distributions to your child until he reaches a certain age, or prevent your IRA money from going to your child’s creditors, while still benefiting from the stretch provision. See Through Trusts can be further categorized as either “Conduit Trusts” or “Accumulation Trusts.” In a nutshell, Conduit Trusts must make the Required Minimum Distributions (RMD) each year, and Accumulation Trusts allow the trustee to accumulate the RMD for a later distribution. To qualify as a See Through Trust, certain specific requirements must be met. Because of these strict requirements, your typical revocable living trust will not qualify; another trust must be settled specifically to be the beneficiary of your IRA.
So why not just use a “Trusteed IRA” (also called “Individual Retirement Trust”)? A Trusteed IRA is where the actual IRA agreement with the custodial account manager has some trust characteristics, such as requiring the beneficiary to only withdraw RMD, unless more is needed for health, education, support, etc. The main problem with a Trusteed IRA is that it cannot accumulate income, unlike an Accumulation Trust. A Trusteed IRA therefore might expose your minor child to more money earlier than you want him to receive it.
Example: Dad has substantial funds in his IRA. He doesn’t want his two minor children to inherit too much too early, so he settles an Accumulation Trust, which provides for distributions to his children for health, education, maintenance, and support until they are 25, at which time they receive one-half of their share, and when they are 30 they receive the remainder of their share. Dad makes this Accumulation Trust the beneficiary of his IRA, and so his children are still able to stretch out the deferred income tax benefits of the IRA.