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Should I add a trust as the beneficiary to my retirement accounts?

Should I add a trust as the beneficiary to my retirement accounts?

May 24, 2021

Retirement plan distribution options for IRA beneficiaries, 401(k), or similar qualified plans are complex and varied.

If you're in the process of choosing beneficiaries for your retirement and estate plans, it's essential to understand the options and the tax implications of each. Outcomes can vary significantly based on the distribution method you choose. 

The owner of an IRA can name anyone they desire to be the designated beneficiary of their retirement account. Increasingly, clients rely on their advisors for advanced beneficiary-planning strategies, such as calling a trust as the beneficiary of a retirement account. When designating a beneficiary for a retirement account, one option is to leave the money to a trust. This advanced beneficiary-planning strategy has many rules that you need to know:

  • Naming rules are liberal, thus offering IRA owners several options in designating a beneficiary; in fact, any individual (spouse, sibling, children, grandchildren, etc.) and non-individual (charity, estate, or trust) can be a named beneficiary. However, the regulations require post-death required minimum distributions (RMDs), forcing the account beneficiary to liquidate the account over time (10 years from the original account owner's death).
  • Designating a "look-through" trust as an IRA beneficiary is tricky and complicated, with potentially significant tax consequences if not implemented and executed according to the myriad of IRA rules and regulations. A look-through would assure that the trust beneficiaries are treated as the IRA's direct beneficiary. These are some of the requirements a trust must meet for a "look-through" or "see-through" to take effect:
    1. The trust must be a valid trust under state law.
    2. The trust must be irrevocable upon the plan owner's death.
    3. All beneficiaries must be easily identifiable, eligible, and named.
  • Owners of retirement accounts need to be aware of the nuances and appropriateness of these arrangements. It's crucial to hire a seasoned attorney familiar with drafting qualifying trust and retirement plan distribution rules.

Pros of naming a trust as a beneficiary:

  • Minor and disabled beneficiary advantages
  • Second marriage
  • Spendthrift beneficiary
  • The beneficiary needs assistance managing the IRA investments and implementing a "stretch" payout

Cons of naming a trust as a beneficiary:

  • No tax benefits
  • Expenses and extra fees
  • Some IRA custodians don't always allow it

As you're planning, please feel free to reach out and discuss your options. We can help you make an informed decision aligned with your financial goals and objectives.


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