Should I name my trust as the beneficiary of my retirement accounts?
After you complete a trust, the next phase is to determine when and how the trust should be funded. That often brings up the common question - “Should I name my trust as the beneficiary of my retirement accounts?”
This simple question has complex implications because, unlike other assets, retirement accounts such as Traditional or Rollovers IRAs, Roth IRAs, Roth/Traditional 401k’s, etc. all have varying tax rules that must be considered to come to the best overall outcome. In other words, you have to find the balance between the administrative hassle (the cost) of using the trust as a beneficiary of the retirement accounts and the net benefit from an after-tax and control standpoint.
Although you will need to work with an experienced estate planning attorney to find the solution that works best for you, here are the general answers based on common situations that I’ve dealt with over the years:
If you are married (first marriage, not a blended family), of average wealth, and are not concerned about remarriage risk or creditor risk, and have no charitable inclinations, then it is generally okay to leave the retirement account outright to your surviving spouse. However, if you have young children or are concerned about your contingent beneficiaries’ spending habits, then the contingent or secondary beneficiary on the account (in the event your spouse predeceases you) should be named as your trust in order to make sure your instructions are followed and (in the event that your children are minors) to prevent any unnecessary court involvement.
If you are married, but you are concerned about creditor/remarriage risk, then it is generally recommended that the trust be named as the primary beneficiary with the appropriate provisions to alleviate unnecessary implications. Put differently, you need to be careful about how you word the distribution language and whether you want the trust to be considered an accumulation trust as opposed to a conduit trust - both of which are sometimes referred to as see-through trusts for tax planning purposes. The tax implications require you to have an in-depth conversation with your estate planning attorney in conjunction with your personal/subjective preferences to determine the best type of trust for you. This type of situation works best if you have a good independent trustee involved.
If you are married or unmarried, but have charitable intentions, then you may find that naming a particular charity outright may be the best choice for your retirement account beneficiary designation. This can generally be done in whole or in part. Since pre-tax funded retirement accounts (for example, traditional IRA’s) do not get the benefit of a stepped up basis and generally carry an income tax liability on distributions, you may kill two birds with one stone by getting the benefit of fulfilling your wishes to charities, reducing estate taxes, and providing your children/remainder beneficiaries with the best overall after-tax outcome by leaving your non-charity beneficiaries other property that doesn’t have the same tax implications as the traditional IRA/401k.
If you are unmarried and have adult children who are responsible and you are not concerned about creditor/divorce risk, then it is fine to name the children as outright beneficiaries of the retirement accounts as opposed to the trust if that meets your general dispositive intentions.
As you can imagine, this question cannot be reliably answered without a full understanding of your situation, but it is my hope that the above generalities give you a better idea of which category you may fall into.
If you’d like to speak specifically about your own estate planning situation, then feel free to give me a call at 781 202 6368 or email me at JLento@PerennialTrust.com to schedule your free personal consultation.
I’m always happy to help,
Joseph M. Lento, J.D.
Your local estate planning attorney
Perennial Estate Planning
477 Main Street
Stoneham, MA 02180
