Today’s blog is about a very common question I get involving retirement account beneficiaries, so I’ve invited a local attorney in Las Vegas Jay Larsen to discuss the topic.
Retirement Plans and Living Trusts – Should Your IRA Beneficiary be your Trust?
So many people today hold assets in various types of retirement accounts. And with so many people having revocable living trusts as a central part of their estate plan, the questions inevitably arise: Should I name my trust as the beneficiary of the retirement account? Or should I name my spouse or children directly as the beneficiaries?
As you can imagine, the answer is that “it depends” on a number of factors. Entire chapters in retirement planning books are dedicated to this topic. For purposes of this post, I want to dispel a common misunderstanding and give you a general rule of thumb.
Myth
I often hear from clients that they were told that their trust cannot be the beneficiary of the retirement plan. This is not true. Trusts absolutely can be named as a beneficiary of a retirement plan. The issue is what is the consequence of doing so? Does it make sense to do so?
Trust as Beneficiary Rule of Thumb
If the plan participant is married, it is usually preferable to name the spouse as the primary beneficiary of retirement benefits. The spouse will have more options, such as the ability to roll the benefits into his or her own individual retirement account, thereby potentially deferring the required withdrawals.
The secondary beneficiary could be the trust or the children directly. This decision will depend upon a number of factors, such as the children’s ages, how many children there are, the size of the retirement account, and whether you are okay with the beneficiary receiving all the funds at once.
While it makes perfect sense for a beneficiary to extend the payout as long as possible, many beneficiaries are not that patient. They want the money now! Naming the trust as the beneficiary can be a great way to protect the beneficiary from himself by forcing a slower payout.
Or if your children are still minors, naming the trust probably makes sense. Most people do not like the thought of their children having unlimited access to large amounts of cash at age 18. Again, naming the trust is a good way to protect the assets and make sure they are available for important events in the child’s life, such as education.
A trust is also a convenient way to plan for contingencies, such the premature death of the intended beneficiary.
Trust Beneficiary Requirements
Whatever the reason for naming the trust as the retirement plan beneficiary, you will want the trust to qualify as a “designated beneficiary” so that distributions can be stretched out over a longer period of time. Generally a designated beneficiary is an individual. But regulations allow a trust to also qualify as a designated beneficiary for purposes of minimum distribution rules.
There are four requirements to be met for the trust to be a designated beneficiary. They are:
1. The trust is valid under state law.
2. The trust either is or will be irrevocable upon the participant’s death.
3. The trust beneficiaries who have an interest in the retirement benefits must be “identifiable . . . from the trust instrument.”
4. Specific trust documentation must be provided to the plan administrator.
There is also a fifth unwritten requirement. It is that all beneficiaries be individuals. If the first four requirements are met, you are allowed to “look through” the trust to the life expectancy of the beneficiaries for minimum distribution purposes. An estate or a charity, for example, does not have a life expectancy, and therefore cannot be a designated beneficiary.
If your trust meets the requirements listed above, you can look through the trust to the individual beneficiaries for their life expectancies and minimum required distributions. Often you will look to the oldest trust beneficiary’s life expectancy when calculating the required distributions. However, if done properly, you can still use each beneficiaries’ age for determining his or her individual required distribution.
So naming your revocable living trust as the beneficiary or contingent beneficiary of a retirement plan makes sense for different reasons and for different situations. The key is to make certain the trust meets the regulatory requirements. This is where having experienced estate planning counsel comes into play.
Again – for more information on wills, trusts, and estate planning please give Jay a call here www.attorney-lasvegas.com