A Designated Beneficiary Trust (DBT) is a trust established to be the beneficiary of an IRA after you have died, to prevent your beneficiaries (usually your children) from having immediate access to all the money in the IRA.
If your family trust provides that the inheritance your children will receive will be held in trust for them until they reach a certain age, then you do not want them to have immediate use of your IRA when you die. Making your children the direct beneficiaries of your IRA would give them the right to withdraw the money from the IRA, thereby negating your wishes to have the monies held until they reach a specified age.
To be certain that distributions from IRAs are consistent with the rest of your Estate Plan you could create a DBT and make it the beneficiary of your IRA. The DBT would have a trustee (someone you would name, usually the same person as the trustee for your children in your family trust), and would provide how distributions are to be made to your children. For example, the DBT could provide that your children receive only what the trustee thinks they need, and your children will receive what is left in the DBT at ages 30 and 35.
There are also income tax benefits to establishing a DBT. If you name a trust, such as a Family Trust, to be the beneficiary of your IRA, and the trust does not qualify as a DBT, the trust will be treated as having withdrawn all of the moneys from the IRA and will need to pay the income tax on the entire IRA at that time.
If, however, you name a DBT as the beneficiary of your IRA, the trust is only required to take withdrawals from the IRA over your child’s life expectancy. So if your child has a 50 year life expectancy and there is $500,000 in the IRA, the trust would only need to withdraw $50,000 in the first year and pay the income tax on that amount. The remaining $450,000 would continue to be invested through the IRA and would be withdrawn in subsequent years, 1/49th in the 2nd year after you die, 1/48th in the 3rd year after you die, etc. In addition, the money in the IRA would continue to grow so that the income tax savings to your child through the DBT will result in your child ultimately receiving more money from the IRA than if he or she took the money out of the IRA and paid the income tax when you die.