Ask the Expert: Leaving an IRA to a minor

How can I leave an IRA to a minor beneficiary? Should I name the child's parent as the beneficiary/custodian? If so, when and how would the minor receive IRA distributions?

Name a trust for the child's benefit as your IRA beneficiary. You can name the child's parent as the trustee. The trust takes IRA distributions, which the trustee pays to the child or spends on his or her behalf.

The trust must take its first annual required minimum distribution (RMD) from the IRA by Dec. 31 of the year after your death. If your trust is worded correctly, the Internal Revenue Service allows RMDs to be taken over the child's life expectancy as shown in a unisex actuarial table in IRS publication 590. For example, if it's a $100,000 IRA and the child is 10 years old, the first RMD is $1,373.62 -- $100,000 divided by a 72.8 life expectancy. Ideally, the trustee will take only RMDs, and most of the money will keep growing tax-deferred in the IRA for decades, substantially increasing the child's inheritance. Of course, the trustee can always take larger and more frequent IRA distributions if the child needs them.

But you don't want IRA distributions to accumulate in the trust! In fact, your trust language should make it clear that the trustee must promptly move any IRA distributions from the trust into a regular account that covers the child's needs. The reason is that all IRA distributions are taxable. Distributions that are promptly paid out of the trust are taxed at the child's rate. Distributions that stay in the trust are taxed at trust rates, which are much higher than rates on people.

The bottom line To leave an IRA to a minor child, name a trust for his benefit as your IRA beneficiary.

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