If you’ve read this column with any regularity, you know I believe in the benefits of leaving your estate to your heirs in trust rather than outright. A successful heir will appreciate the fact that the trust keeps their inheritance from adding to their own estate tax problem.

And most of your heirs are mature adults whose lives include run-of-the-mill risks like accidents (catastrophic creditors), divorce (catastrophic marriage) and nursing home expenses (catastrophic illness). Trusts can be designed to give each heir broad control over their inheritance even while they benefit from the tax and catastrophe protections.

If you are married and want to provide for your surviving spouse, you leave much of your estate in a credit shelter trust (CST) for that spouse. They can take whatever they need to live comfortably; then upon death, the remaining trust assets pass on to benefit your children. In addition to protecting the assets from your spouse’s run-of-the-mill life risks, the trust enables the two of you to maximize the use of your respective estate tax exemptions: You can leave up to $4 million to eventually pass to your heirs, as can your spouse.

How CST works

Let’s say the clients are Bill and Mary, and Bill dies first. With the estate tax as it is, there are four distinct advantages of Mary receiving assets in a CST instead of outright: estate tax avoidance, plus protecting assets from creditors, nursing home spenddown and a subsequent spouse if Mary remarries.

Related:How to escape the Illinois estate tax

So obviously, Bill would leave his farm in a CST for Mary. But what about investment accounts, and especially a tax-deferred retirement account? Every dollar withdrawn from the IRA will be taxable income.

Financial and accounting professionals often say Bill must leave his IRA directly to Mary rather than to the CST for her benefit. This is not necessarily so.

If Mary is Bill’s beneficiary, she claims the IRA as a spousal rollover. Her required withdrawals will be small and based on her age — no required withdrawals until she is 73 years old, and then only a small fraction annually. Mary pays the income tax on these withdrawals in her personal tax bracket. Under these rules, the account could continue to grow for most of her lifetime.

Mary has complete freedom to designate beneficiaries to take upon her death. She could leave the IRA to a new husband! But even if she leaves it to her and Bill’s children, they have 10 additional years after Mary’s death over which to spread the IRA withdrawals and taxation.

The other option

What if Bill’s IRA is left to a CST? In a worst-case scenario (assuming a well-drafted trust), the entire value of the account must be withdrawn, and taxes paid, within 10 calendar years after Bill’s death. The IRA would be withdrawn and the taxes paid in a shorter period than if Mary had received the IRA and withdrawn minimums over her lifetime.

If Mary dies before the IRA is exhausted in the 10th year, the children receiving what is left from the CST must finish the withdrawals within 10 years from Bill’s death. More sophisticated trust drafting can allow the CST to spread the tax-deferred withdrawals over most of Mary’s lifetime, in which case the CST achieves nearly the same tax deferral as the spousal rollover.

So, is it better to leave the IRA to Mary or to the CST for her benefit? It depends. What is more important to you? Are the four protections of the CST more valuable, or is maximum income-tax deferral on the IRA more important?

To maximize their flexibility, my client Bill would name the trust as primary beneficiary and Mary as contingent beneficiary on his IRA. At Bill’s death, Mary, her attorney, and the financial adviser have a conversation: “As trustee of the CST, you can claim the IRA, and the CST will hold it for your benefit. Or, the trustee can disclaim it and it will pass to you, Mary, as the spousal rollover beneficiary. All things considered, what shall we do?”

One or more of the four protections may be important at that time. Mary’s estate is large. Mary is on the nursing home doorstep. Remarriage seems probable. Mary faces a catastrophic creditor. The trustee claims the IRA. If not, the trustee disclaims, and the IRA rolls over to Mary.

By naming the trust as primary beneficiary and Mary as contingent beneficiary, the final decision on where the IRA goes can wait until after the Bill’s death.