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A trust for IRA or retirement funds can benefit Californians

On Behalf of | Oct 3, 2022 | Estate Planning |

Many San Jose residents may have used an Individual Retirement Account, or IRA, to set aside money for their retirement.

To give some background, IRAs are one type of many retirement plans that the federal government recognizes and protects with tax incentives and other benefits.

By doing so, the government encourages people to save for their retirement by investing in the American economy.

For similar reasons, California and other states also protect these accounts from an investor’s creditors.

But these protections go only so far. For one, once a person withdraws from an IRA, the funds do not get the same protection from a person’s creditors.

Moreover, if the person winds up dying and passing these funds to their spouse or to the next generation, the assets are not protected from the loved one’s creditors.

What is an IRA trust and how does it work?

When a Californian believes that they will pass some of their tax-exempt retirement funds, to their loved ones, they should consider whether creating an IRA trust would be a good idea.

While the person lives, the IRA may not be transferred to a trust. Moreover, any transfer of an IRA, subject to some exceptions, is going to be treated as if it were a withdrawal and result in some negative tax consequences for the owner of the account.

However, a person can still create a trust designed to receive their IRA at the time of their death. They then name this trust as the IRA’s account beneficiary.

Because of rules surrounding IRAs and other considerations, an IRA trust is not the best option in all situations. However, the IRA trust does give the owner of the IRA the chance to set terms and conditions on how their loved ones can use the funds.

This control can help protect these assets from a loved one’s creditors, including ex-spouses and creditors from a failed business investment.

A resident of the Bay Area who has assets in their IRA or other retirement account should consider exploring an IRA trust and other alternatives with an experienced attorney.