Naming A Trust as the Beneficiary of a 401K/IRA?

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Barefootgirl
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Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Barefootgirl »

Have any of you named your trust as the beneficiary of your 401K or IRA as part of your estate plan? Any potential issues or problems with it that you are aware of, with doing this?

I realize that it's something called a "wasting asset" - but I'm thinking that after I pass, the trust holds what the trust holds, it is what it is....

Hopefully it goes without saying that I wouldn't be considering this if I had better options...there are personal considerations involved.
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neverpanic
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by neverpanic »

Are you married? I cannot speak to all situations, but the custodian required me to get my wife's signature authorizing me to designate the trust as beneficiary of my retirement account. We're in a community property state, so that policy made sense to me.
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WoodSpinner
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by WoodSpinner »

OP,

What are you hoping to accomplish with having the Trust as Beneficiary?

What kind of Trust?

This is an area where you really need legal advice pertinent to your goals and state.

If you go down this road, the trust has to be very carefully written in order to comply with the IRS rules post Secure Act.

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humblecoder
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by humblecoder »

I am not an accountant, tax attorney, or tax expert.

You don't mention if you are taking about a Traditional 401k/IRA (i.e. pre-tax) or a Roth 401k/IRA (i.e. tax free).

If you are talking about a Traditional 401k/IRA, you may want to look into the tax implications of naming a trust as beneficiary.

Under the Secure Act, a trust must take required minimum distributions or RMD's from an inherited 401k/IRA over a very short period of time (I believe 5 or 10 years depending upon the circumstances). If those RMD's are meant to accumulate in the trust (as opposed to being paid out to the beneficiary), then they would be subject to the Trust Tax rates which are extremely high (https://smartasset.com/taxes/trust-tax-rates). Above only around $13K of income, the trust tax rate is 37%!

The same RMD distributed to an individual would be taxed at the normal tax rates which are much more favorable.

Obviously, if you have reasons for naming the trust as beneficiary that outweigh the extreme tax burden (protection from a spendthrift heir), then maybe it makes sense. I don't know what your circumstances are and nor am I asking that you share them. I am only pointing out that if you do this, you are giving away a lot in taxes potentially. Consider if there is another option, like leaving other assets for the trust, doing Roth conversions of the IRA's that you plan to leave in the trust.

If you google "trust beneficiary of an IRA post secure act" you will find a number of articles on this topic.

If you are talking about a Roth IRA, then none of the above applies.
bsteiner
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by bsteiner »

Our clients leave retirement benefits in trust for the same reasons they leave other assets in trust. It keeps the assets out of the beneficiaries' estates for estate tax purposes, and protects them against the beneficiaries' creditors and spouses, and Medicaid.

However, trusts reach the top income tax bracket at a very low level. In the case of traditional IRA benefits, the trustees have to choose each year between making distributions to save income taxes (in most cases) at the cost of giving up the protections of the trust, or accumulating the IRA distributions at the cost of paying additional income tax (or doing some of each).

A Roth conversion avoids this tradeoff.

Other possibilities to obtain or replicate the stretch, which may or may not be available or appropriate in a given case, are to leave IRA benefits in trust for a disabled or chronically ill beneficiary, or to a charitable remainder trust.
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Lee_WSP
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Lee_WSP »

It's still a tax arbitrage question with beneficiary protection considerations.

Bruce has laid out the possible workarounds.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by ThankYouJack »

My spouse is the primary beneficiary and my trust under will is my secondary beneficiary. My attorney really emphasized the exact wording to use for the beneficiaries.

I'm not really concerned about the negative tax implications because the chance of my spouse and I both dying around the same time is slim. But when we get older or if one of us dies/has health issues we'll discuss and reassess with our attorney.
toddthebod
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by toddthebod »

I have my wife as primary beneficiary and our trust as contingent beneficiary. My 401(k) is through Fidelity. The website even has a specific form for entering your trust information. They had me put a specific Tax ID that they listed instead of my own SSN. I don't know what that's about.
petulant
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by petulant »

bsteiner wrote: Tue Jun 21, 2022 11:57 am Our clients leave retirement benefits in trust for the same reasons they leave other assets in trust. It keeps the assets out of the beneficiaries' estates for estate tax purposes, and protects them against the beneficiaries' creditors and spouses, and Medicaid.

However, trusts reach the top income tax bracket at a very low level. In the case of traditional IRA benefits, the trustees have to choose each year between making distributions to save income taxes (in most cases) at the cost of giving up the protections of the trust, or accumulating the IRA distributions at the cost of paying additional income tax (or doing some of each).

A Roth conversion avoids this tradeoff.

Other possibilities to obtain or replicate the stretch, which may or may not be available or appropriate in a given case, are to leave IRA benefits in trust for a disabled or chronically ill beneficiary, or to a charitable remainder trust.
Assume that a couple would prefer to have IRA amounts distributed but want to leave a bit of trustee discretion, while for other assets like life insurance proceeds, the couple want to let the assets accumulate for a longer period of time (imagine a young minor beneficiary). Should all assets be put in one trust, or is it cleaner or more advisable to use one trust for the traditional/IRA assets, and another for "normal" assets?
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by bsteiner »

petulant wrote: Tue Jun 21, 2022 1:26 pm ...
Assume that a couple would prefer to have IRA amounts distributed but want to leave a bit of trustee discretion, while for other assets like life insurance proceeds, the couple want to let the assets accumulate for a longer period of time (imagine a young minor beneficiary). Should all assets be put in one trust, or is it cleaner or more advisable to use one trust for the traditional/IRA assets, and another for "normal" assets?
Before the SECURE Act, the stretch was measured by the oldest beneficiary's life expectancy, and permissible appointees may have been considered beneficiaries. So we would create a parallel set of trusts for the retirement benefits, identical except that no one older than the desired oldest beneficiary could ever receive anything.

This may not be necessary under the new proposed regulations, but we're waiting until the regulations are issued in final form.
Last edited by bsteiner on Tue Jun 21, 2022 4:11 pm, edited 1 time in total.
Ranunculus
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Ranunculus »

humblecoder wrote: Tue Jun 21, 2022 11:47 am I am not an accountant, tax attorney, or tax expert.

You don't mention if you are taking about a Traditional 401k/IRA (i.e. pre-tax) or a Roth 401k/IRA (i.e. tax free).

If you are talking about a Traditional 401k/IRA, you may want to look into the tax implications of naming a trust as beneficiary.

Under the Secure Act, a trust must take required minimum distributions or RMD's from an inherited 401k/IRA over a very short period of time (I believe 5 or 10 years depending upon the circumstances). If those RMD's are meant to accumulate in the trust (as opposed to being paid out to the beneficiary), then they would be subject to the Trust Tax rates which are extremely high (https://smartasset.com/taxes/trust-tax-rates). Above only around $13K of income, the trust tax rate is 37%!

The same RMD distributed to an individual would be taxed at the normal tax rates which are much more favorable.

Obviously, if you have reasons for naming the trust as beneficiary that outweigh the extreme tax burden (protection from a spendthrift heir), then maybe it makes sense. I don't know what your circumstances are and nor am I asking that you share them. I am only pointing out that if you do this, you are giving away a lot in taxes potentially. Consider if there is another option, like leaving other assets for the trust, doing Roth conversions of the IRA's that you plan to leave in the trust.

If you google "trust beneficiary of an IRA post secure act" you will find a number of articles on this topic.

If you are talking about a Roth IRA, then none of the above applies.
This is a good summary of the main drawback to naming a trust as beneficiary of retirement accounts, and a good estate planning attorney should bring this up and discuss the options. Our approach has been to make Roth conversions every year and leave our beneficiary named on the taxable retirement accounts. Most of our assets will go into a spendthrift trust with a corporate trustee, but what’s left in the retirement accounts will go directly to our beneficiary, paid out over 10 years. The risk of our beneficiary squandering the retirement funds or losing them to an ex-spouse or creditors seems less to us now than the guaranteed loss of 37% to the IRS, but we reassess that risk regularly. It also keeps the fee for trust management lower, since corporate trustees charge based on assets under management rather than the amount of work required.
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FreddieFIRE
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by FreddieFIRE »

bsteiner wrote: Tue Jun 21, 2022 1:48 pm
petulant wrote: Tue Jun 21, 2022 1:26 pm ...
Assume that a couple would prefer to have IRA amounts distributed but want to leave a bit of trustee discretion, while for other assets like life insurance proceeds, the couple want to let the assets accumulate for a longer period of time (imagine a young minor beneficiary). Should all assets be put in one trust, or is it cleaner or more advisable to use one trust for the traditional/IRA assets, and another for "normal" assets?
Before the SECURE Act, the stretch was measured by the oldest beneficiary's life expectancy, and permissible appointees may have been considered beneficiaries. So we would create a parallel set of trusts for the retirement benefits, identical except that no one other than the desired oldest beneficiary could ever receive anything.

This may not be necessary under the new proposed regulations, but we're waiting until the regulations are issued in final form.
Did you mean to say "older," and not "other?"
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FreddieFIRE
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by FreddieFIRE »

Ranunculus wrote: Tue Jun 21, 2022 2:03 pm This is a good summary of the main drawback to naming a trust as beneficiary of retirement accounts, and a good estate planning attorney should bring this up and discuss the options. Our approach has been to make Roth conversions every year and leave our beneficiary named on the taxable retirement accounts. Most of our assets will go into a spendthrift trust with a corporate trustee, but what’s left in the retirement accounts will go directly to our beneficiary, paid out over 10 years.
Are you suggesting that even the Roth assets will be paid directly to the (spendthrift) beneficiary and NOT to the spendthrift trust? Wouldn't you rather have those protected as well? IIRC, the spendthrift trust could be treated as a non-individual recipient, and the Roth assets would be liquidated (but held in trust indefinitely) after five years.
The risk of our beneficiary squandering the retirement funds or losing them to an ex-spouse or creditors seems less to us now than the guaranteed loss of 37% to the IRS, but we reassess that risk regularly.
The Roth assets would not have this guaranteed loss in the scenario described above. 8-)
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Ranunculus »

FreddieFIRE wrote: Tue Jun 21, 2022 2:24 pm
Ranunculus wrote: Tue Jun 21, 2022 2:03 pm This is a good summary of the main drawback to naming a trust as beneficiary of retirement accounts, and a good estate planning attorney should bring this up and discuss the options. Our approach has been to make Roth conversions every year and leave our beneficiary named on the taxable retirement accounts. Most of our assets will go into a spendthrift trust with a corporate trustee, but what’s left in the retirement accounts will go directly to our beneficiary, paid out over 10 years.
Are you suggesting that even the Roth assets will be paid directly to the (spendthrift) beneficiary and NOT to the spendthrift trust? Wouldn't you rather have those protected as well? IIRC, the spendthrift trust could be treated as a non-individual recipient, and the Roth assets would be liquidated (but held in trust indefinitely) after five years.
The risk of our beneficiary squandering the retirement funds or losing them to an ex-spouse or creditors seems less to us now than the guaranteed loss of 37% to the IRS, but we reassess that risk regularly.
The Roth assets would not have this guaranteed loss in the scenario described above. 8-)
Only the taxable accounts will go directly to the beneficiary, the trust is named as beneficiary of the Roth accounts. Hopefully we will have many years to draw down the taxable accounts. The risk of this strategy is highest early on and lessens with time as the taxable accounts are depleted by Roth conversions and RMDs. Our beneficiary has not demonstrated spendthrift tendencies, but has also not demonstrated the ability to manage an estate.
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FreddieFIRE
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by FreddieFIRE »

Ranunculus wrote: Tue Jun 21, 2022 2:33 pm
FreddieFIRE wrote: Tue Jun 21, 2022 2:24 pm
Ranunculus wrote: Tue Jun 21, 2022 2:03 pm This is a good summary of the main drawback to naming a trust as beneficiary of retirement accounts, and a good estate planning attorney should bring this up and discuss the options. Our approach has been to make Roth conversions every year and leave our beneficiary named on the taxable retirement accounts. Most of our assets will go into a spendthrift trust with a corporate trustee, but what’s left in the retirement accounts will go directly to our beneficiary, paid out over 10 years.
Are you suggesting that even the Roth assets will be paid directly to the (spendthrift) beneficiary and NOT to the spendthrift trust? Wouldn't you rather have those protected as well? IIRC, the spendthrift trust could be treated as a non-individual recipient, and the Roth assets would be liquidated (but held in trust indefinitely) after five years.
The risk of our beneficiary squandering the retirement funds or losing them to an ex-spouse or creditors seems less to us now than the guaranteed loss of 37% to the IRS, but we reassess that risk regularly.
The Roth assets would not have this guaranteed loss in the scenario described above. 8-)
Only the taxable accounts will go directly to the beneficiary, the trust is named as beneficiary of the Roth accounts. Hopefully we will have many years to draw down the taxable accounts. The risk of this strategy is highest early on and lessens with time as the taxable accounts are depleted by Roth conversions and RMDs. Our beneficiary has not demonstrated spendthrift tendencies, but has also not demonstrated the ability to manage an estate.
That makes sense. Your statement "but what’s left in the retirement accounts will go directly to our beneficiary, paid out over 10 years" confused me, since a Roth is a retirement account.

That said, your plan looks like a good one. Many who make the Roth conversion decisions look only at their own potential future tax rates. Add in estate planning with trusts, and the equation can shift considerably. I've been on this same path, but have probably reached a point of equilibrium (strong Roth conversions but retention of a "good" amount of pre-tax IRA funds).
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Lee_WSP »

Ranunculus wrote: Tue Jun 21, 2022 2:03 pm
humblecoder wrote: Tue Jun 21, 2022 11:47 am I am not an accountant, tax attorney, or tax expert.

You don't mention if you are taking about a Traditional 401k/IRA (i.e. pre-tax) or a Roth 401k/IRA (i.e. tax free).

If you are talking about a Traditional 401k/IRA, you may want to look into the tax implications of naming a trust as beneficiary.

Under the Secure Act, a trust must take required minimum distributions or RMD's from an inherited 401k/IRA over a very short period of time (I believe 5 or 10 years depending upon the circumstances). If those RMD's are meant to accumulate in the trust (as opposed to being paid out to the beneficiary), then they would be subject to the Trust Tax rates which are extremely high (https://smartasset.com/taxes/trust-tax-rates). Above only around $13K of income, the trust tax rate is 37%!

The same RMD distributed to an individual would be taxed at the normal tax rates which are much more favorable.

Obviously, if you have reasons for naming the trust as beneficiary that outweigh the extreme tax burden (protection from a spendthrift heir), then maybe it makes sense. I don't know what your circumstances are and nor am I asking that you share them. I am only pointing out that if you do this, you are giving away a lot in taxes potentially. Consider if there is another option, like leaving other assets for the trust, doing Roth conversions of the IRA's that you plan to leave in the trust.

If you google "trust beneficiary of an IRA post secure act" you will find a number of articles on this topic.

If you are talking about a Roth IRA, then none of the above applies.
This is a good summary of the main drawback to naming a trust as beneficiary of retirement accounts, and a good estate planning attorney should bring this up and discuss the options. Our approach has been to make Roth conversions every year and leave our beneficiary named on the taxable retirement accounts. Most of our assets will go into a spendthrift trust with a corporate trustee, but what’s left in the retirement accounts will go directly to our beneficiary, paid out over 10 years. The risk of our beneficiary squandering the retirement funds or losing them to an ex-spouse or creditors seems less to us now than the guaranteed loss of 37% to the IRS, but we reassess that risk regularly. It also keeps the fee for trust management lower, since corporate trustees charge based on assets under management rather than the amount of work required.
You could just have the deferred account also go into trust. The trustee should have discretion to distribute the RMD’s to achieve tax minimization or spendthrift protection.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Lee_WSP »

petulant wrote: Tue Jun 21, 2022 1:26 pm
bsteiner wrote: Tue Jun 21, 2022 11:57 am Our clients leave retirement benefits in trust for the same reasons they leave other assets in trust. It keeps the assets out of the beneficiaries' estates for estate tax purposes, and protects them against the beneficiaries' creditors and spouses, and Medicaid.

However, trusts reach the top income tax bracket at a very low level. In the case of traditional IRA benefits, the trustees have to choose each year between making distributions to save income taxes (in most cases) at the cost of giving up the protections of the trust, or accumulating the IRA distributions at the cost of paying additional income tax (or doing some of each).

A Roth conversion avoids this tradeoff.

Other possibilities to obtain or replicate the stretch, which may or may not be available or appropriate in a given case, are to leave IRA benefits in trust for a disabled or chronically ill beneficiary, or to a charitable remainder trust.
Assume that a couple would prefer to have IRA amounts distributed but want to leave a bit of trustee discretion, while for other assets like life insurance proceeds, the couple want to let the assets accumulate for a longer period of time (imagine a young minor beneficiary). Should all assets be put in one trust, or is it cleaner or more advisable to use one trust for the traditional/IRA assets, and another for "normal" assets?
Are you asking about two trusts for the same and only beneficiary or a single combined trust for the retirement benefits which will have multiple beneficiaries and separate trusts for each named beneficiary for the other assets?
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Barefootgirl
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Barefootgirl »

Does it throw a fly into the ointment to insert this additional information?

The beneficiaries of my trust are my grandchildren. Right now, they are minors....with luck, by the time they would inherit the assets of the trust, they would be adults...and the trust is scheduled not to pay out until that they are in their 20s/30s, but for advanced educational expenses.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by delamer »

ThankYouJack wrote: Tue Jun 21, 2022 1:11 pm My spouse is the primary beneficiary and my trust under will is my secondary beneficiary. My attorney really emphasized the exact wording to use for the beneficiaries.

I'm not really concerned about the negative tax implications because the chance of my spouse and I both dying around the same time is slim. But when we get older or if one of us dies/has health issues we'll discuss and reassess with our attorney.
Who (or what) is the beneficiary of the trust?

My will creates trusts for each adult child titled “The Delamer Child A Retirement Trust” as the secondary beneficiary. There will be no “Delamer Trust.”
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by FreddieFIRE »

delamer wrote: Tue Jun 21, 2022 3:15 pm
ThankYouJack wrote: Tue Jun 21, 2022 1:11 pm My spouse is the primary beneficiary and my trust under will is my secondary beneficiary. My attorney really emphasized the exact wording to use for the beneficiaries.

I'm not really concerned about the negative tax implications because the chance of my spouse and I both dying around the same time is slim. But when we get older or if one of us dies/has health issues we'll discuss and reassess with our attorney.
Who (or what) is the beneficiary of the trust?

My will creates trusts for each adult child titled “The Delamer Child A Retirement Trust” as the secondary beneficiary. There will be no “Delamer Trust.”
Secondary beneficiary?

Do your retirement accounts name these TBD trusts as primary beneficiaries? Or, is there some other step? Thx.
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delamer
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by delamer »

FreddieFIRE wrote: Tue Jun 21, 2022 3:34 pm
delamer wrote: Tue Jun 21, 2022 3:15 pm
ThankYouJack wrote: Tue Jun 21, 2022 1:11 pm My spouse is the primary beneficiary and my trust under will is my secondary beneficiary. My attorney really emphasized the exact wording to use for the beneficiaries.

I'm not really concerned about the negative tax implications because the chance of my spouse and I both dying around the same time is slim. But when we get older or if one of us dies/has health issues we'll discuss and reassess with our attorney.
Who (or what) is the beneficiary of the trust?

My will creates trusts for each adult child titled “The Delamer Child A Retirement Trust” as the secondary beneficiary. There will be no “Delamer Trust.”
Secondary beneficiary?

Do your retirement accounts name these TBD trusts as primary beneficiaries? Or, is there some other step? Thx.
Sorry I wasn’t clearer.

My spouse is the primary beneficiary (100%). The trusts are the contingent beneficiaries — 50%/50% to each adult child — if my husband is deceased.

(I believe contingent and secondary are interchangeable in this context. If not, I’m sure someone will correct me.)
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by bsteiner »

FreddieFIRE wrote: Tue Jun 21, 2022 2:17 pm
bsteiner wrote: Tue Jun 21, 2022 1:48 pm ...
Before the SECURE Act, the stretch was measured by the oldest beneficiary's life expectancy, and permissible appointees may have been considered beneficiaries. So we would create a parallel set of trusts for the retirement benefits, identical except that no one other than the desired oldest beneficiary could ever receive anything.

This may not be necessary under the new proposed regulations, but we're waiting until the regulations are issued in final form.
Did you mean to say "older," and not "other?"
Yes. I edited it.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by ThankYouJack »

delamer wrote: Tue Jun 21, 2022 3:15 pm
ThankYouJack wrote: Tue Jun 21, 2022 1:11 pm My spouse is the primary beneficiary and my trust under will is my secondary beneficiary. My attorney really emphasized the exact wording to use for the beneficiaries.

I'm not really concerned about the negative tax implications because the chance of my spouse and I both dying around the same time is slim. But when we get older or if one of us dies/has health issues we'll discuss and reassess with our attorney.
Who (or what) is the beneficiary of the trust?

My will creates trusts for each adult child titled “The Delamer Child A Retirement Trust” as the secondary beneficiary. There will be no “Delamer Trust.”
My kids are the beneficiaries of the trust. For the backup/secondary beneficiary, I have "To the Trust Under Will of ThankYouJack"
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by petulant »

bsteiner wrote: Tue Jun 21, 2022 1:48 pm
petulant wrote: Tue Jun 21, 2022 1:26 pm ...
Assume that a couple would prefer to have IRA amounts distributed but want to leave a bit of trustee discretion, while for other assets like life insurance proceeds, the couple want to let the assets accumulate for a longer period of time (imagine a young minor beneficiary). Should all assets be put in one trust, or is it cleaner or more advisable to use one trust for the traditional/IRA assets, and another for "normal" assets?
Before the SECURE Act, the stretch was measured by the oldest beneficiary's life expectancy, and permissible appointees may have been considered beneficiaries. So we would create a parallel set of trusts for the retirement benefits, identical except that no one older than the desired oldest beneficiary could ever receive anything.

This may not be necessary under the new proposed regulations, but we're waiting until the regulations are issued in final form.
Thanks.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by petulant »

Lee_WSP wrote: Tue Jun 21, 2022 2:59 pm
petulant wrote: Tue Jun 21, 2022 1:26 pm
bsteiner wrote: Tue Jun 21, 2022 11:57 am Our clients leave retirement benefits in trust for the same reasons they leave other assets in trust. It keeps the assets out of the beneficiaries' estates for estate tax purposes, and protects them against the beneficiaries' creditors and spouses, and Medicaid.

However, trusts reach the top income tax bracket at a very low level. In the case of traditional IRA benefits, the trustees have to choose each year between making distributions to save income taxes (in most cases) at the cost of giving up the protections of the trust, or accumulating the IRA distributions at the cost of paying additional income tax (or doing some of each).

A Roth conversion avoids this tradeoff.

Other possibilities to obtain or replicate the stretch, which may or may not be available or appropriate in a given case, are to leave IRA benefits in trust for a disabled or chronically ill beneficiary, or to a charitable remainder trust.
Assume that a couple would prefer to have IRA amounts distributed but want to leave a bit of trustee discretion, while for other assets like life insurance proceeds, the couple want to let the assets accumulate for a longer period of time (imagine a young minor beneficiary). Should all assets be put in one trust, or is it cleaner or more advisable to use one trust for the traditional/IRA assets, and another for "normal" assets?
Are you asking about two trusts for the same and only beneficiary or a single combined trust for the retirement benefits which will have multiple beneficiaries and separate trusts for each named beneficiary for the other assets?
I had imagined a single beneficiary in my mind, but I didn't really want to limit the question. I like bsteiner's phrase "parallel trusts." That's my question. Would it be typical to set up parallel trusts for traditional retirement accounts vs. other assets, or a single trust?
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by WoodSpinner »

Barefootgirl wrote: Tue Jun 21, 2022 3:08 pm Does it throw a fly into the ointment to insert this additional information?

The beneficiaries of my trust are my grandchildren. Right now, they are minors....with luck, by the time they would inherit the assets of the trust, they would be adults...and the trust is scheduled not to pay out until that they are in their 20s/30s, but for advanced educational expenses.
I think this may be very tax inefficient—Assuming you have PreTax Retirement accounts and hope to retain RMDs in the trust for benefit of your grandkids.

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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Lee_WSP »

petulant wrote: Tue Jun 21, 2022 7:48 pm
Lee_WSP wrote: Tue Jun 21, 2022 2:59 pm
petulant wrote: Tue Jun 21, 2022 1:26 pm
bsteiner wrote: Tue Jun 21, 2022 11:57 am Our clients leave retirement benefits in trust for the same reasons they leave other assets in trust. It keeps the assets out of the beneficiaries' estates for estate tax purposes, and protects them against the beneficiaries' creditors and spouses, and Medicaid.

However, trusts reach the top income tax bracket at a very low level. In the case of traditional IRA benefits, the trustees have to choose each year between making distributions to save income taxes (in most cases) at the cost of giving up the protections of the trust, or accumulating the IRA distributions at the cost of paying additional income tax (or doing some of each).

A Roth conversion avoids this tradeoff.

Other possibilities to obtain or replicate the stretch, which may or may not be available or appropriate in a given case, are to leave IRA benefits in trust for a disabled or chronically ill beneficiary, or to a charitable remainder trust.
Assume that a couple would prefer to have IRA amounts distributed but want to leave a bit of trustee discretion, while for other assets like life insurance proceeds, the couple want to let the assets accumulate for a longer period of time (imagine a young minor beneficiary). Should all assets be put in one trust, or is it cleaner or more advisable to use one trust for the traditional/IRA assets, and another for "normal" assets?
Are you asking about two trusts for the same and only beneficiary or a single combined trust for the retirement benefits which will have multiple beneficiaries and separate trusts for each named beneficiary for the other assets?
I had imagined a single beneficiary in my mind, but I didn't really want to limit the question. I like bsteiner's phrase "parallel trusts." That's my question. Would it be typical to set up parallel trusts for traditional retirement accounts vs. other assets, or a single trust?
I’ve seen it done, but it’s far more efficient to simply create a single trust for a single beneficiary. Even when drafting a GST plan, you can actually administer it in the same trust, you just need to account for it.
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Barefootgirl
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Barefootgirl »


Obviously, if you have reasons for naming the trust as beneficiary that outweigh the extreme tax burden (protection from a spendthrift heir), then maybe it makes sense. I don't know what your circumstances are and nor am I asking that you share them. I am only pointing out that if you do this, you are giving away a lot in taxes potentially. Consider if there is another option, like leaving other assets for the trust, doing Roth conversions of the IRA's that you plan to leave in the trust


This pretty much sums up my situation in a nutshell. Reviewing Roth options currently.

Thank you, sometimes it helps to frame the issue crystallized all in one statement.
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Barefootgirl
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Barefootgirl »

I just wanted to double check, the only issue with naming the trust as a beneficiary of a 401K or Traditional IRA is the tax burdens pursuant to the Secure Act?

No other issues? thanks
How many retired people does it take to screw in a lightbulb? Only one, but he takes all day.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by chemocean »

Ranunculus wrote: Tue Jun 21, 2022 2:03 pm
humblecoder wrote: Tue Jun 21, 2022 11:47 am I am not an accountant, tax attorney, or tax expert.

You don't mention if you are taking about a Traditional 401k/IRA (i.e. pre-tax) or a Roth 401k/IRA (i.e. tax free).

If you are talking about a Traditional 401k/IRA, you may want to look into the tax implications of naming a trust as beneficiary.

Under the Secure Act, a trust must take required minimum distributions or RMD's from an inherited 401k/IRA over a very short period of time (I believe 5 or 10 years depending upon the circumstances). If those RMD's are meant to accumulate in the trust (as opposed to being paid out to the beneficiary), then they would be subject to the Trust Tax rates which are extremely high (https://smartasset.com/taxes/trust-tax-rates). Above only around $13K of income, the trust tax rate is 37%!

The same RMD distributed to an individual would be taxed at the normal tax rates which are much more favorable.

Obviously, if you have reasons for naming the trust as beneficiary that outweigh the extreme tax burden (protection from a spendthrift heir), then maybe it makes sense. I don't know what your circumstances are and nor am I asking that you share them. I am only pointing out that if you do this, you are giving away a lot in taxes potentially. Consider if there is another option, like leaving other assets for the trust, doing Roth conversions of the IRA's that you plan to leave in the trust.

If you google "trust beneficiary of an IRA post secure act" you will find a number of articles on this topic.

If you are talking about a Roth IRA, then none of the above applies.
This is a good summary of the main drawback to naming a trust as beneficiary of retirement accounts, and a good estate planning attorney should bring this up and discuss the options. Our approach has been to make Roth conversions every year and leave our beneficiary named on the taxable retirement accounts. Most of our assets will go into a spendthrift trust with a corporate trustee, but what’s left in the retirement accounts will go directly to our beneficiary, paid out over 10 years. The risk of our beneficiary squandering the retirement funds or losing them to an ex-spouse or creditors seems less to us now than the guaranteed loss of 37% to the IRS, but we reassess that risk regularly. It also keeps the fee for trust management lower, since corporate trustees charge based on assets under management rather than the amount of work required.
One of my beneficiaries is in a high risk profession. My beneficiary designation names a single-beneficiary trust for that beneficiary's proportion of each account (both traditional and Roth IRAs). Other beneficiaries, not in high risk professions, are named outright. With the passage of the Secure Act, as many on this thread have suggested, tax planning for both owner and beneficiaries is an essential strategy when considering a trust as beneficiary.
As a means to reduce the overall tax burden, I have started converting to Roth IRAs to comfortably below the first IRMMA threshold. The marginal tax rate of most of the Roth conversions is 22% for MFJ. The marginal tax rate for all beneficiaries is likely to be 22 (25% in 2026).
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Lee_WSP »

Barefootgirl wrote: Thu Jun 23, 2022 7:59 am I just wanted to double check, the only issue with naming the trust as a beneficiary of a 401K or Traditional IRA is the tax burdens pursuant to the Secure Act?

No other issues? thanks
The trustee can distribute it out, so it’s not exactly a guarantee the retirement distributions will be taxed at trusts brackets.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Ranunculus »

Lee_WSP wrote: Thu Jun 23, 2022 10:26 am
Barefootgirl wrote: Thu Jun 23, 2022 7:59 am I just wanted to double check, the only issue with naming the trust as a beneficiary of a 401K or Traditional IRA is the tax burdens pursuant to the Secure Act?

No other issues? thanks
The trustee can distribute it out, so it’s not exactly a guarantee the retirement distributions will be taxed at trusts brackets.
But wouldn't a trust that specifies distributions based on "Health, Education, Maintenance, Support" need to be amended to include the ability to distribute the RMDs in order to avoid taxation? It puts the trustee in a complex situation, making the decision to increase distributions in excess of HEMS and risking that the beneficiary loses/squanders the funds and blames the trustee. I suspect a corporate trustee might prefer to keep the funds "safe" and just pay 37% to the IRS.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Lee_WSP »

Ranunculus wrote: Thu Jun 23, 2022 12:48 pm
Lee_WSP wrote: Thu Jun 23, 2022 10:26 am
Barefootgirl wrote: Thu Jun 23, 2022 7:59 am I just wanted to double check, the only issue with naming the trust as a beneficiary of a 401K or Traditional IRA is the tax burdens pursuant to the Secure Act?

No other issues? thanks
The trustee can distribute it out, so it’s not exactly a guarantee the retirement distributions will be taxed at trusts brackets.
But wouldn't a trust that specifies distributions based on "Health, Education, Maintenance, Support" need to be amended to include the ability to distribute the RMDs in order to avoid taxation? It puts the trustee in a complex situation, making the decision to increase distributions in excess of HEMS and risking that the beneficiary loses/squanders the funds and blames the trustee. I suspect a corporate trustee might prefer to keep the funds "safe" and just pay 37% to the IRS.
It would be a very poorly written trust which does not allow a disinterested trustee discretion to distribute for any purpose unless that is exactly what the grantor intends (which IMO is a poor plan, but we can’t change grantor’s opinions in many cases). However, if that is indeed the grantor’s intent, then such a trust would be doing what it’s supposed to be doing by denying distributions.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by FreddieFIRE »

Barefootgirl wrote: Thu Jun 23, 2022 7:59 am I just wanted to double check, the only issue with naming the trust as a beneficiary of a 401K or Traditional IRA is the tax burdens pursuant to the Secure Act?

No other issues? thanks
If the trust is not properly structured, the retirement account assets would need to be withdrawn within five years. It the trust is properly structured so that the beneficiaries are considered individuals in the eyes of the IRS (i.e. a "see through" trust), then they can be stretched over ten years. I'm describing a qualified conduit trust. An accumulation trust (doesn't require immediate distributions to the beneficiaries) is another option, but it would have further restrictions on how the trust is drafted.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Hi10Lo5 »

FreddieFIRE wrote: Thu Jun 23, 2022 1:55 pm
Barefootgirl wrote: Thu Jun 23, 2022 7:59 am I just wanted to double check, the only issue with naming the trust as a beneficiary of a 401K or Traditional IRA is the tax burdens pursuant to the Secure Act?

No other issues? thanks
If the trust is not properly structured, the retirement account assets would need to be withdrawn within five years. It the trust is properly structured so that the beneficiaries are considered individuals in the eyes of the IRS (i.e. a "see through" trust), then they can be stretched over ten years. I'm describing a qualified conduit trust. An accumulation trust (doesn't require immediate distributions to the beneficiaries) is another option, but it would have further restrictions on how the trust is drafted.
FreddieFIRE, I originally had the same impression too, that only "see through" trusts such as conduit trust gets the favorable 10 year rule treatment. However, in reading some other posts, I am under the impression that even a Living Revocable Trust that names actual individuals as beneficiaries (as in OP's case the grandchildren) would suffice and still get the favorable 10 year rule treatment. If, on the other hand, the LRT names individuals (such as the grandchildren) AND a charity for example, then the 10 year rule is off-limits since the charity is not a named individual. Maybe someone else can state this more eloquently than I, but that's what I remember reading.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by FreddieFIRE »

Hi10Lo5 wrote: Thu Jun 23, 2022 6:04 pm
FreddieFIRE wrote: Thu Jun 23, 2022 1:55 pm
Barefootgirl wrote: Thu Jun 23, 2022 7:59 am I just wanted to double check, the only issue with naming the trust as a beneficiary of a 401K or Traditional IRA is the tax burdens pursuant to the Secure Act?

No other issues? thanks
If the trust is not properly structured, the retirement account assets would need to be withdrawn within five years. It the trust is properly structured so that the beneficiaries are considered individuals in the eyes of the IRS (i.e. a "see through" trust), then they can be stretched over ten years. I'm describing a qualified conduit trust. An accumulation trust (doesn't require immediate distributions to the beneficiaries) is another option, but it would have further restrictions on how the trust is drafted.
FreddieFIRE, I originally had the same impression too, that only "see through" trusts such as conduit trust gets the favorable 10 year rule treatment. However, in reading some other posts, I am under the impression that even a Living Revocable Trust that names actual individuals as beneficiaries (as in OP's case the grandchildren) would suffice and still get the favorable 10 year rule treatment. If, on the other hand, the LRT names individuals (such as the grandchildren) AND a charity for example, then the 10 year rule is off-limits since the charity is not a named individual. Maybe someone else can state this more eloquently than I, but that's what I remember reading.
Yes. It's not an issue of being a living trust or another type of trust. It's a matter of how the trust is drafted. I believe that common living trust templates currently include specific sections for dealing with inherited qualified assets (i.e. retirement accounts). While other assets of the trust can benefit non-individuals, there are restrictions for distributions of withdrawals from the qualified accounts. I am not a lawyer.
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Re: Naming A Trust as the Beneficiary of a 401K/IRA?

Post by Lee_WSP »

See through status just means only people may be beneficiaries.
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