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Do You Need a Retirement Plan Trust for Your IRA?

When we do estate planning with families, our clients often ask if they should name their living trust as the beneficiary of their IRA or 401k. Our answer is usually “no.”

We almost always recommend that our married clients name their spouse as primary beneficiary. That’s easy. The tougher question is – who should be the contingent beneficiary? Should it be their children? Should it be their living trust? Or should it be a stand-alone retirement plan trust?

If your children are adults and mature (ie, they will make smart financial decisions) you can name your children as contingent beneficiaries. But what if your children are having marital problems or are really bad with money? Then you may want to use a trust.

As I explained in my earlier post, a trust can be an effective way to give someone other than your child, like  a parent, brother, sister, or friend, the authority to determine how much of the IRA or 401k to distribute to your child.

Why not name your living trust as the contingent beneficiary? The simple answer is –  in most cases your living trust will not qualify as a beneficiary of your IRA or 401k.

  • Your living trust must be irrevocable when the retirement plan owner dies. If you have a joint trust and one spouse dies, half or all of the living trust will remain revocable, and your living trust will not qualify as a beneficiary of your retirement plan.
  • The funding formula in your living trust must be a fractional or disclaimer formula. If your living trust includes a pecuniary funding formula, which many do, then your living trust will not qualify as a beneficiary of your retirement plan.
  • If your living trust  includes powers of appointment for your beneficiaries, then it will not qualify as a beneficiary of your retirement plan.
  • If your living trust requires your trustee to pay debts and expenses of your estate, then it will not not qualify as a beneficiary of your retirement plan.

For these, and several other reasons, a living trust is usually not a good choice to be beneficiary of your IRAs or 401ks.

If your children need the protection of a trust for their inherited IRA or 401k, you should consider using a stand alone retirement plan.

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