20 Aug Should You Name A Trust As A Beneficiary Of A Retirement Account?
Prior to the passage of the SECURE ACT, trusts named as a beneficiary of a retirement account could be prepared to stretch distributions (for tax-deferred growth) over the lifetime of the designated beneficiary. However, unless the beneficiary is either (1) a spouse; (2) someone less than 10 years younger than the retirement account owner; (3) a child of the retirement account owner who is under the age of majority; (4) disabled; or (5) chronically ill, then the beneficiary must distribute the retirement account within 10 years after the death of the retirement account owner.
TAX-DEFERRED GROWTH GOAL:
If tax-deferred growth is the only goal, then stand-alone trusts, trusts within wills and trusts within trusts can be drafted for an eligible designated beneficiary (a beneficiary who meets one of the 5 exceptions mentioned in the preceding paragraph) to achieve that goal. Even if a beneficiary is not an eligible designated beneficiary, sometimes charitable trusts can be utilized to achieve the stretch.
Normally you would not name a revocable living trust as beneficiary unless there is only one (sole) beneficiary of the trust and the beneficiary is an eligible designated beneficiary. Even then, there should be other considerations. For example, if a parent set up a revocable trust which had a contingent supplemental needs trust for the benefit of their disabled child who receives Medicaid benefits, then the trust should have an “accumulation” provision so there are no income distributions resulting in potential disqualification for valuable public benefits.
NON-TAX GOALS:
Sometimes the goal is to create a trust to protect a beneficiary from various problems including, but not limited to: (1) potential marital problems of the beneficiary; (2) concern about a beneficiary’s spouse may remarry and you want to control how the asset goes after the death of your beneficiary; (3) the beneficiary being a spend-thrift; (4) the beneficiary having an addiction; (5) the beneficiary having creditor problems or potential creditor issues (in Texas, inherited IRAs have creditor protection, but in most states that is not the law).
It should be noted that irrevocable trusts (which would be used to protect the beneficiary for the non-tax goal as set forth above) have a compressed tax rate. So, if the retirement account names an irrevocable trust as a beneficiary for protection of the beneficiary of the trust, there is generally far greater income taxes (especially since distributions must be made within 10 years of death of the retirement account owner if the beneficiary is not an eligible designated beneficiary), even if the beneficiary is the sole beneficiary. Thus, there must be an evaluation of what is more important – the least amount of income taxes or protection of the beneficiary from non-tax goals as set forth above. So, it is possible to name a properly drafted trust as a beneficiary of a retirement account, but the retirement account owner should evaluate the pros and cons before making that decision.
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