Naming the trust as the beneficiary of retirement accounts does not alter the requirement that the IRA or 401(k) be emptied out in 10 years. Still, if the retirement monies are distributed to the trust, then the trust can control how the funds are to be used and when the funds will actually get into the hands of the trust heirs. There are pros and cons to designating your trust as beneficiary.
CON: Your spouse loses the ability to rollover the retirement account into his/her name (a direct rollover by the spouse avoids the 10-year payout rule under the SECURE Act).
The solution would be to name your spouse as the primary beneficiary so that the favorable rollover terms would apply. You could name your trust as the secondary beneficiary in the event your spouse does not outlive you.
PRO: If you name the trust as the primary beneficiary in place of your spouse, it allows your retirement account to be protected should your spouse remarry following your death (assuming your trust has some remarriage protections in place and does not distribute trust assets outright to your spouse immediately upon your death).
CON: Allowing IRA distributions to accumulate inside of a trust means the trust pays the associated income taxes. The tax rate for trusts is often higher than an individual’s rate.
PRO: Allowing the IRA distributions to accumulate inside of the trust allows those funds to be protected from a beneficiary who may be too immature, too unsophisticated, or too unwise to be in control of that much money.
Ultimately, there is no one-size-fits-all approach. Each person must consider all of the pros and cons and make the best decision possible for his or her family and loved ones. For people curious about ways to lessen the impact retirement accounts may have on their kids' inheritance, consult a financial advisor about whether (1) converting traditional retirement accounts to Roth retirement accounts makes sense, and (2) reducing your rate of contributions to your traditional retirement accounts is wise considering these types of accounts are no longer useful as wealth transfer vehicles. In addition, if you are concerned about the amount of money available to your beneficiaries and the impact income taxes may have on the actual amount of inheritance your beneficiaries receive, you may want to explore ways to infuse your estate with additional cash upon your death (for example, by adding or increasing life insurance coverage).
NOTE: Although Roth IRAs and Roth 401(k)s also require a maximum 10-year payout period, the distributions are not taxable. Since income taxes are not a factor with Roth accounts, the decision over whether to fund your trust with these accounts becomes less complicated. Your two primary considerations are (1) the age and maturity level of your children and (2) the level of concern you have over assets being diverted from your children should your spouse remarry after your death. If your trust contains remarriage restrictions and/or if your children’s inheritance is via a trust (as opposed to being distributed to your child outright at your death), then you should consider naming your trust as either the primary or secondary beneficiary of your trust.
Making sure your retirement beneficiaries are properly designated is not an easy task given the complexity of the law and the changing rules. If you want to better understand how the SECURE Act impacts your plans, schedule an advisory phone call with Attorney Amy Privette. For a more thorough analysis of all of your beneficiary arrangements, call the office or send us an email to set up a Beneficiary Alignment.
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