Retirement Trust Lawyers Helping to Set Up Your Beneficiaries For Your Qualified Retirement Accounts

When it comes to estate planning, your qualified retirement account (i.e. your IRA, 401(k), etc.) is usually the most overlooked part of your estate plan. Most people don’t receive enough direction when it comes to their qualified retirement account. Often times you’re told what you shouldn’t do, but not what you should do.

Your qualified retirement account cannot be owned by your trust. When you pass away there should be a beneficiary that you’ve named on the account who can receive the remaining funds. And if you’re like most people, you will either list your surviving spouse, if there is one, or your surviving children.

Should You Name Your Children as Beneficiaries?

Naming your children directly as beneficiaries means they receive that money in their own name, which creates at least a couple of issues. First, because you named them directly, the IRA is exposed to their liabilities. For example, if your beneficiary gets divorced, that money is now subject to that divorce. Or if your beneficiary gets in a car accident, that money is subject to that lawsuit. The qualified retirement account that you’ve left for them, that you were hoping would last for many years, is now gone and they didn’t get to enjoy it.

Second, if you name a minor child or grandchild as a beneficiary, they aren’t old enough to legally own a qualified retirement account. This can trigger a very expensive and time-consuming court proceeding where somebody is appointed to watch over the account until the beneficiary turns 18. This creates another problem, now an 18-year-old is in charge of possibly a very large amount of taxable money.

If Naming Your Beneficiaries Directly Is Not a Good Idea, Then What About Naming Your Living Trust?

The danger in naming your living trust is that it can accelerate the income tax that is due after your death. Furthermore, most living trusts that we’ve reviewed (over 10,000 and counting) do not provide any asset protection for the beneficiaries.

At this point, you’re probably thinking, “Well, what else am I supposed to do? I have to name a beneficiary otherwise my IRA will go through probate, right?”That’s true, you need to name a beneficiary. But most people are given only two options, name your children as beneficiaries directly, or name your living trust as the beneficiary. As we’ve discussed, each one of these options has its own unique problems.

In a Life Plan, when appropriate, we include a special planning tool called a Retirement Trust. A Retirement Trust is designed to eliminate the two problems. First, it provides asset protection to the beneficiaries of the Retirement Trust. This means the qualified retirement account is protected from the beneficiary’s divorce, lawsuit, bankruptcy, etc. Second, it doesn’t trigger additional income taxes, even though you’ve named a trust as the beneficiary.

Essentially, the Retirement Trust is a hybrid of the two options. You provide asset protection to your beneficiaries, without triggering additional income taxes. If you have a qualified retirement account, you should consider a Retirement Trust as part of your estate plan.