Should I Name My Trust As the Beneficiary of My Retirement Account?

"best estate planning lawyer"If you have created a revocable living trust, you may be wondering if you should name your trust as the beneficiary of your 401(k) plan or other retirement account.  The main concern has been the tax consequences of doing so.

In 2003, the Internal Revenue Service (IRS) issued rulings which provided that a properly drafted revocable trust could be named as the beneficiary of a retirement plan without adverse income tax consequences.  In 2005, Congress passed the Pension Protection Act of 2005. That Act allows a revocable trust to be an eligible beneficiary of a retirement plan.

So, what is the advantage of naming a revocable trust as the beneficiary of your retirement plan?   In short, it is the ability to control the distribution of the proceeds of the retirement plan when the account holder dies.  Below are a few examples of the problems that can arise when you name an individual as the beneficiary of a trust:

  • Naming an individual as the beneficiary can lead to problems if the beneficiary dies before the account holder and the documents aren’t updated.  A trust doesn’t have this complication.
  • Retirement proceeds are protected from claims of creditors in Florida.  However, if there is no surviving named beneficiary and the default beneficiary is the deceased account holder’s estate, the distributed retirement funds can be subjected to the claims of the deceased account holder’s creditors.
  • If you name an individual as the beneficiary, the retirement account proceeds could end up in the wrong person’s hands.  For instance, if the named beneficiary (or default beneficiary) has a lawsuit pending against him/her, is going through a divorce, or is incapacitated at the time of distribution, the distribution could wind up in the hands of creditors or a divorcing spouse.

Naming a trust as the beneficiary of your 401(k) or other retirement account can allow you to avoid some of the issues that can occur when your beneficiary is an individual.  It allows you the ability to ensure that the proceeds of your retirement plan actually benefit those that you love.  However, keep in mind that depending on your retirement vehicle, naming an individual can be more beneficial if that person is able to take your retirement account, such as a 401, and make it their retirement account, this can be especially helpful for a younger beneficiary to start his or her own retirement account.

This blog is based on the law as it currently exists.  The Obama proposed budget for 2013 might change the current law, so be sure to check back to our website frequently for updates.  Additionally, if you are interested in discussing whether you should name your trust as beneficiary of your retirement account(s), contact The Curran Law Firm to learn more

Getting Legal Help

If you live in or near Jupiter, Florida, and you need assistance with estate planning, contact Maura Curran at 561.935.9763 and toll free 855.873.7268.  We are committed to providing professional legal representation while educating families on how to protect their loved ones and their assets.  If you are looking for an attorney you can trust, contact Maura Curran today!