IRA Beneficiary
22. Disadvantages
As good as this option is, there are some disadvantages to keep in mind.
First, you cannot provide for your spouse and stretch out the tax-deferred growth over your children's or grandchildren's life expectancies. That's because you must use the life expectancy of the oldest beneficiary of the trust. And if your spouse is a beneficiary of the trust, he or she will probably be the oldest beneficiary.
Of course, if your spouse is not a beneficiary of this trust, then the oldest beneficiary may be one of your children. That would let you stretch out the tax deferral over your child's life expectancy. But then the money would not be available to your spouse unless your child wants to be generous.
Next, when you name the trust as beneficiary, you lose the spousal rollover option. There have been times when the IRS did allow a spousal rollover even though a trust was beneficiary, but each time there were very specific circumstances. If you want to be sure your spouse will have the option of using the rollover, name your spouse as beneficiary.
Finally, distributions from your tax-deferred account that are paid to the trust are subject to income tax. If the money stays in the trust, a higher income tax rate would probably apply, because many trusts pay income taxes at a higher rate than most individuals. However, this would only apply to income that STAYS in the trust. Usually this is not a problem, because the trustee usually distributes the money to the beneficiaries of the trust, who pay the income tax at their own, usually lower, rates.
NOTE: With a revocable living trust, this would only happen after the grantor dies.