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Trust as Beneficiary of a Retirement Account

Do You Have an IRA, 401k, 403b, or Other Retirement Account?

For many people their retirement account(s) is one of their largest assets, if not the largest. Upon death of the owner most retirement accounts pass according to the beneficiary designation. Naming individual beneficiaries, such as your children, works fine in some situations, but you must be careful. For example, if children are specifically named as equal beneficiaries (or contingent beneficiaries), without saying more, then it may be unclear what happens to the share of a child who doesn't survive you.

Naming individual beneficiaries, even when done carefully, is not always a good idea. You may not want a child to have complete access and/or control over the inherited funds for a period of time, or in some cases for the child's entire lifetime. There are several possible reasons for this, including your child's age/maturity, financial responsibility, creditor problems, potential for divorce and/or reliance on government assistance, such as SSI or Medi-Cal. In these and similar situations naming a trust as the beneficiary of your retirement account(s) can provide substantial protection and benefits to the beneficiaries.

"See-Through Trusts" Qualify as a Designated Beneficiary!

Many people have been, and continue to be, advised NOT to name their trust as beneficiary of a retirement account. The historical reason for this is that when a trust is named as a beneficiary of a retirement account the entire account must generally be distributed within 5 years after the death of the account owner (losing significant potential tax benefits). However, the tax laws have recently clarified that a retirement account which names a valid "see-through trust" as beneficiary is an exception, and distributions from the retirement account to a see-through trust may be "stretched out" over the life expectancy of the individual trust beneficiary (in some cases the oldest of multiple beneficiaries). The economic benefits of the "stretch out" are significant, which is why trusts were rarely named as beneficiaries of retirement accounts in the past.

Valid see-through trusts not only give you the significant economic benefit of the "stretch out", they give you the ability to control when and how your beneficiaries receives the inherited retirement funds from the trust. In short, in many cases a See-Through Trust may be a much better alternative than naming individual beneficiaries of a retirement account.

Have Questions? Schedule An Appointment Today!

Planning for the proper distribution of a retirement account upon death can be complicated. At Sterzer & Associates, A Law Corporation, it is a top priority of ours to explain complicated matters in plain English. Please contact us if you have any questions or would like to schedule a consultation.