Your Trust and Retirement Accounts

Revocable trusts are an important estate planning tool that is utilized in many estate plans.  Most assets can be held in a revocable trust but there are exceptions.  One such exception is retirement accounts like an IRA, 401k or 403b.  These types of accounts should not be owned by a trust and a trust should only be the beneficiary in limited circumstances.

A qualified retirement account can only be owned by an individual.  There are many rules and restrictions related to changing the ownership of a retirement account.  If you transfer a retirement account to your trust, there will likely be penalties assessed and income tax due.  Do not transfer ownership of your retirement account without consulting your tax advisor and financial advisor.  Generally, transferring a retirement account to a trust is not advised.

A trust can be made the beneficiary of a retirement account but, again, caution should be used.  Trusts usually pay higher income tax rates than individuals.  Also, it is often easier for an individual to manage an inherited retirement account than it is for a trustee to manage a retirement account on behalf of a trust.  So, it is usually best to have retirement accounts inherited directly by the beneficiaries rather than be held in trust for beneficiaries.

There are times when naming your trust as the beneficiary of a retirement account is appropriate.  The potential for higher taxes and more cumbersome administration can be offset if the retirement accounts should be managed by the trustee due to concerns with the beneficiaries.  Some situations that might justify using a trust as a retirement account beneficiary include minors as beneficiaries, concerns with marriage of beneficiary, the beneficiary’s inability to manage assets and providing creditor protection.  Particularly when a retirement account may involve large amounts of money and concerns about the beneficiary, naming the trust as the beneficiary may be warranted.

In all situations, the retirement account should have at least one beneficiary named.  If no beneficiaries are named, the account will go through probate and the administration burden on the executor and trustee will be significant.  Be sure to double-check all retirement accounts to be sure a beneficiary is named.

The integration of retirement accounts in estate planning is an important component of most people’s attempt to transfer assets to the next generation.  Be sure to discuss your retirement accounts with your attorney, tax advisor and financial advisor.  Making changes to the beneficiary designations of retirement accounts is a relatively easy process but knowing whom to name as the beneficiary should include careful analysis and consultation with your advisor team.