Naming a Trust as the Beneficiary of 401K or IRA

One question I frequently get asked is “Should I name a trust as the beneficiary of my IRA or 401K?”

For many, the answer is no. Too often, trusts are named as beneficiaries on retirement accounts without understanding the future complications it may cause. In my view, there is only one valid reason to name a trust as the beneficiary for your IRA or 401K, and that is to exert control over asset distribution. The following situations are a few examples of when naming a trust as your beneficiary could be beneficial:

• If you have young children or grandchildren who would not be able to handle a large sum of money. A trust would control the distributions in the way you deem best.
• If you are in a second marriage and would like for your spouse to receive benefits upon your death, but also want to make sure your children are protected. A trust would ensure that your spouse does not change the ultimate beneficiaries of your account upon his/her death.
• If you have a special needs child and don’t want to impact his/her eligibility for government benefits. A trust would allow you to make sure that your child can still have the quality of life he or she is accustomed to upon your death.

The main complication you face with trusts named on a retirement account is taxes. If done incorrectly, it can trigger excessive taxes and, ultimately, leave your beneficiaries with less money.

Planning for the ultimate distribution of your retirement account is, in my view, the most overlooked area of estate planning.