As with most estate planning questions, the short answer is “it depends.” Naming a trust as the beneficiary of your retirement assets has advantages and disadvantages. Much depends on who your beneficiaries are right now and whether their interests are better suited to a trust. These assets include defined contribution and benefit plans, such as:
- Individual retirement accounts (IRAs)
- Roth IRAs
- Profit-sharing plans
In most cases, investors name primary and contingency beneficiaries, who inherit the proceeds after the owner’s death, usually spouses, children and grandchildren. Recipients of these direct distributions benefit from bypassing the lengthy, costly and stressful probate process. Trusts also avoid probate, but placing the proceeds into a trust after your death can provide other unique benefits.
Reasons For Naming A Trust As Recipient
Designating a trust as your beneficiary may make sense if any of these scenarios apply:
- Your heirs are young children or grandchildren
- They have special needs
- Your heirs suffer from addiction
- They are irresponsible with money or face creditor issues
- They are in danger of facing lawsuits
- You remarried and want to ensure that your second spouse receives their due inheritance
- You have no spouse, children or other heirs
Naming a trust as beneficiary for these assets can make sense if you want to control distributions to your heirs or ensure professional management over future investment decisions. It’s advisable to discuss your options with a knowledgeable Illinois estate planning and trust attorney if any of these circumstances apply.
One significant drawback to naming a trust as the beneficiary is that retirement assets are typically subject to required minimum distributions, or RMD. These payouts are calculated according to the oldest beneficiary’s life expectancy.
If you only have one beneficiary, it’s generally not an issue, but this can be problematic with a trust if you have several heirs of various ages. Instead, if these benefits are distributed directly to individual beneficiaries, each heir’s RMD payout is based on their own life expectancy, stretching distributions over a more extended period.
Other potential disadvantages include employer restrictions over trusts receiving periodic 401(k) payouts, in which all deferred taxes must be paid within one year of the owner’s death. Many employers do not allow life-expectancy distributions to trust beneficiaries. However, it’s possible that proceeds may be rolled over into an IRA.
The IRS also has specific rules for trust beneficiaries. For example, 401(k)s typically must go to one person or a group of people and not to charities, churches or other entities. You may also be required to select contingent beneficiaries in case your primary beneficiary dies before all funds have been paid. Illinois also has specific rules for trust beneficiaries.
Special Considerations For Retirement Accounts
Retirement assets are often among the most valuable property in a person’s estate plan. For many people, the best route is selecting primary and secondary beneficiaries, with proceeds distributed directly to heirs after your death. However, when special circumstances exist, it can be beneficial to customize your estate plan with a trust designated as the recipient.
Experienced estate planning and trust lawyers take a deep dive into all your financial interests, including retirement accounts. We can lay out the options for providing maximum protection for you during your lifetime, minimizing taxes and maximizing benefits for your heirs and ensuring that hard-earned assets are distributed according to your wishes.
The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.
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