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Stand Alone Retirement Plan Trust

We generally recommend our clients name their spouse or children as beneficiaries of their retirement plans (IRA, 401k, 403b, 457, etc.).

We do not recommend that our clients name their living trust as beneficiary of their retirement plans because, in most cases, a living trust will not qualify as a designated beneficiary.

If your living trust does not qualify, then your beneficiary will have to distribute the retirement funds out within five years, and it will all be taxed as income.

A living trust typically does not qualify as a designated beneficiary for the following reasons:

  • A 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.
  • If you have a joint trust, 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 designated beneficiary.
  • If your living trust includes powers of appointment for your beneficiaries, then it will not qualify as a designated beneficiary.
  • If your living trust requires your trustee to pay debts and expenses of your estate, then it will not not qualify as a designated beneficiary.

But what if you don’t want to leave your child in control of their inherited retirement plan? Some children have a rocky marriage, creditors, drug or alcohol problems or are bad with money. In those cases, you may want a family member or friend to manage the retirement plan for your child. You can do this with a Stand Alone Retirement Plan Trust, which is a special trust written specifically to own a retirement plan. A Stand Alone Retirement Plan Trust allows someone other than your child to manage the distributions while allowing the bulk of the retirement plan funds to continue to grow tax free.

 

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