Listen to Lawrence…What are the pros and cons of naming a trust as beneficiary of an IRA or 401K?

CLIENT QUESTION:

What are the pros and cons of naming a trust as beneficiary of an IRA or 401K?

MY RESPONSE:

Generally speaking, you always want to name an individual as beneficiary rather than a trust as beneficiary, that is unless there is a reason to put the retirement plan in the trust. Wow, that sounds like lawyer double talk! We take a course on double talk in Law School. 😊

Look, we all know that the beneficiary, individual or trust, must take the money out of the retirement plan over a certain period of years (usually over 10 years, but it can be longer for certain beneficiaries). Whatever the number of years, whoever receives these distributions must pay income tax on them. Trusts are most often in a higher tax bracket than individuals, so we need a really good reason to use a trust with the higher tax cost. There are many reasons, such as your children are too young, too irresponsible, too disabled, or you want to keep the money away from your spendthrift son-in-law. Sometimes, we have estate tax avoidance strategies that use a trust, in spite of the higher income tax.

The bottom line is that there should be no knee jerk reaction either way, but instead, there should be a pro and con analysis, case by case, to see if the higher trust income exists in your case and if yes, whether it is worth paying it or whether we can work around it.

I hope this helps! Please forward this information to your friends and relatives to share these informative answers to some very commonly asked questions.

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