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Estate Plan Edge: The IRA, 401(k) and other qualified retirement accounts deserve special consideration when planning your estate.

Curt Ferguson

March 8, 2021

4 Min Read

Most farmers like to leave their estate to their heirs in trust. Not a living trust that ends at the farmer’s death — but a trust created upon the farmer’s death for each child under the terms of the will or living trust.

The universal benefits of leaving the estate in such trusts? Think of them as protection from life risks and taxes. Life risks include lawsuits, divorces and catastrophic health care needs. Trusts also reduce estate and income taxes. Those broad benefits are available while simultaneously giving each heir broad control of his or her trust.

On first blush, a farmer who does not want to “control from the grave” might say, “I’ll just leave everything to the kids and if they want it in trust, they can put it in trust.” But you can’t. This kind of trust — broad control, but protection from life risks and taxes — can only be created by the person giving the property. It cannot be created by the heir after they receive it.

Seeing the benefits of receiving the inheritance in such trusts, the goal of the family becomes, “How do we make sure the entire estate gets into those trusts?” You make sure your living trust says to create such trusts on your death, and then make sure all of your estate follows that living trust.

What about qualified retirement accounts like individual retirement accounts (IRAs) and Roth IRAs? You cannot name your living trust as owner during your life, but you are allowed to name your living trust as beneficiary upon death, so it will be divided among your heirs’ trusts. Should you?

Retirement accounts 101

Qualified retirement accounts come in two basic varieties. When you contribute to a traditional taxable IRA, you deduct the contribution from your taxable income. None of the growth is taxed while in the account. When you withdraw from the taxable IRA, you pay ordinary income taxes on every dollar withdrawn. Even if you don’t need the money, you must start withdrawing and paying taxes on a small fraction each year, starting at age 72. When you die, under the new SECURE Act (Setting Every Community Up for Retirement),  any nonspouse beneficiary who receives the taxable IRA must withdraw the money and pay income tax on it no later than the 10th calendar year after your death.

The second variety of qualified retirement account is a tax-free Roth IRA. You invest after-tax dollars since you receive no tax deduction for contributing. But every dollar withdrawn from the Roth, including all the interest and growth, will be tax free. You never have to withdraw any of your Roth, but according to the SECURE Act, a nonspouse beneficiary must withdraw all of the money by the 10th calendar year after your death. The Roth advantage is that all withdrawals are tax-free.

Where to put the IRA

Should we put IRAs into the protected heirs’ trusts? To do so, you name your living trust as the beneficiary on the IRA account forms. Then upon your death, that trust splits the IRAs among the heirs’ trusts. When a trust for an individual heir claims a share of the IRA, it is under the same SECURE Act rules as an individual beneficiary; the money must be withdrawn by the 10th calendar year after death.

The Roth is simple. Each heir’s trust becomes the owner of a share of the Roth IRA. Until the 10th year, nothing need be withdrawn from the Roth IRA unless the heir wants to spend the money or invest in some other way. In the 10th year it must be withdrawn into the trust, 100% tax-free. It can be distributed from the trust to the heir, or reinvested in the trust, such as to buy more land.

A taxable IRA takes more analysis. If an individual were beneficiary of the taxable IRA, that one individual pays 100% of the tax on all withdrawals from the account. But when a trust is the beneficiary of the IRA, the trust can pay taxes on some of the withdrawals in a tax bracket lower than the heir’s, and some of the withdrawals distributed to the heir so he or she pays taxes. For each heir’s share, there are at least two taxpayers to share the tax burden.

It can always be better — and never be worse — to have the right kind of heir’s trust receive the IRA. Maximize personal and tax protections for every part of the estate, including your IRAs.

Learn more about the will or living trust.

Read more about how trusts reduce income taxes.

Ferguson, an attorney, owns The Estate Planning Center in Salem, Ill. Learn more at

The opinions of this writer are not necessarily those of Farm Progress/Informa.



About the Author(s)

Curt Ferguson

Curt Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at

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