Trust 403(b) beneficiary question

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Teague
Posts: 1522
Joined: Wed Nov 04, 2015 6:15 pm

Trust 403(b) beneficiary question

Post by Teague » Mon Aug 12, 2019 11:25 am

Greetings all,

I will soon be hiring an attorney to create my living trust in the state of California. In the meantime I am trying to educate myself so I can be an informed consumer of the work product.

My question is how to deal with a 403(b) and a 457(b), each holding about $300,000. I do believe that I cannot or at least should not “place” such tax-deferred accounts into the trust. My question, specifically, is - it best to name the trust as beneficiary of these accounts, or name my estate as beneficiary of these accounts, or name no beneficiary for these accounts and instead rely on a pour-over will provision? The plan allows for all of those choices. Or should I do something else entirely?

The two eventual beneficiaries have very different ages, one being a teenager and the other around 55. I mention this as I think look-through issues and RMD schedules will eventually factor into how these accounts will be treated. Thanks.
Semper Augustus

runner3081
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Re: Trust 403(b) beneficiary question

Post by runner3081 » Mon Aug 12, 2019 11:52 am

We have named our trust the beneficiary of retirement accounts.

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celia
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Re: Trust 403(b) beneficiary question

Post by celia » Mon Aug 12, 2019 11:59 am

We listed individuals on our accounts just like on our IRAs so the RMDs can be easily "stretched". (However, if a beneficiary couldn't control their spending or had credit problems or were special needs, then we would probably have put their share in the trust.)

If you want to change the beneficiaries or the proportions going to each beneficiary, would you be willing to amend the trust each time you make a change?

All the assets in our trusts are those that don't have tax-advantaged status.

Topic Author
Teague
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Re: Trust 403(b) beneficiary question

Post by Teague » Mon Aug 12, 2019 12:05 pm

celia wrote:
Mon Aug 12, 2019 11:59 am
We listed individuals on our accounts just like on our IRAs so the RMDs can be easily "stretched". (However, if a beneficiary couldn't control their spending or had credit problems or were special needs, then we would probably have put their share in the trust.)

If you want to change the beneficiaries or the proportions going to each beneficiary, would you be willing to amend the trust each time you make a change?

All the assets in our trusts are those that don't have tax-advantaged status.
Thanks. Unfortunately, there is a teenager involved and I really don't want them to get the money until they are older, so I can't leave it to them directly. But, great idea if that issue wasn't in play.
Semper Augustus

HomeStretch
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Re: Trust 403(b) beneficiary question

Post by HomeStretch » Mon Aug 12, 2019 12:06 pm

Discuss what’s best for you with your attorney.

In our non-community property state, the primary beneficiaries on our retirement accounts are individuals and the contingent beneficiaries are our trusts (my accounts/my trust, spouse’s accounts/spouse's trust).

bsteiner
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Re: Trust 403(b) beneficiary question

Post by bsteiner » Mon Aug 12, 2019 1:52 pm

Teague wrote:
Mon Aug 12, 2019 11:25 am
Greetings all,

I will soon be hiring an attorney to create my living trust in the state of California. ...

My question is how to deal with a 403(b) and a 457(b), each holding about $300,000. I do believe that I cannot or at least should not “place” such tax-deferred accounts into the trust. My question, specifically, is - it best to name the trust as beneficiary of these accounts, or name my estate as beneficiary of these accounts, or name no beneficiary for these accounts and instead rely on a pour-over will provision? The plan allows for all of those choices. Or should I do something else entirely?

The two eventual beneficiaries have very different ages, one being a teenager and the other around 55. I mention this as I think look-through issues and RMD schedules will eventually factor into how these accounts will be treated.
You are correct that you can't transfer these benefits during your lifetime.

Naming your estate as beneficiary will produce a bad result. It will destroy the stretch, and it will expose the benefits to your creditors.

Naming the revocable trust as beneficiary is only slightly better. At best, it will limit the stretch on the entire benefit to the 55-year-old's life expectancy. It will also create administrative complexity, since the revocable trust's purpose after your death is to distribute the assets to the persons or trusts that receive them under the terms of the trust agreement.

If there are enough other assets, you could leave the retirement benefits to a trust for the teenager and other assets to or in trust for the 55-year-old. If not, then you might want to exclude the 55-year-old as a subsequent beneficiary of the teenager's trust (if the teenager dies without leaving any issue).

You would, of course, have to make sure that any trusts that receive IRA benefits comply with the special rules for trusts receiving IRA benefits. See my article on this in the March 2004 issue of BNA Tax Management's Estates, Gifts & Trusts Journal: https://www.kkwc.com/wp-content/uploads ... 132954.pdf.

Topic Author
Teague
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Joined: Wed Nov 04, 2015 6:15 pm

Re: Trust 403(b) beneficiary question

Post by Teague » Mon Aug 12, 2019 3:16 pm

bsteiner wrote:
Mon Aug 12, 2019 1:52 pm
Teague wrote:
Mon Aug 12, 2019 11:25 am
Greetings all,

I will soon be hiring an attorney to create my living trust in the state of California. ...

My question is how to deal with a 403(b) and a 457(b), each holding about $300,000. I do believe that I cannot or at least should not “place” such tax-deferred accounts into the trust. My question, specifically, is - it best to name the trust as beneficiary of these accounts, or name my estate as beneficiary of these accounts, or name no beneficiary for these accounts and instead rely on a pour-over will provision? The plan allows for all of those choices. Or should I do something else entirely?

The two eventual beneficiaries have very different ages, one being a teenager and the other around 55. I mention this as I think look-through issues and RMD schedules will eventually factor into how these accounts will be treated.
You are correct that you can't transfer these benefits during your lifetime.

Naming your estate as beneficiary will produce a bad result. It will destroy the stretch, and it will expose the benefits to your creditors.

Naming the revocable trust as beneficiary is only slightly better. At best, it will limit the stretch on the entire benefit to the 55-year-old's life expectancy. It will also create administrative complexity, since the revocable trust's purpose after your death is to distribute the assets to the persons or trusts that receive them under the terms of the trust agreement.

If there are enough other assets, you could leave the retirement benefits to a trust for the teenager and other assets to or in trust for the 55-year-old. If not, then you might want to exclude the 55-year-old as a subsequent beneficiary of the teenager's trust (if the teenager dies without leaving any issue).

You would, of course, have to make sure that any trusts that receive IRA benefits comply with the special rules for trusts receiving IRA benefits. See my article on this in the March 2004 issue of BNA Tax Management's Estates, Gifts & Trusts Journal: https://www.kkwc.com/wp-content/uploads ... 132954.pdf.
Thank you very much! That was ever so helpful.
Semper Augustus

Alan S.
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Re: Trust 403(b) beneficiary question

Post by Alan S. » Mon Aug 12, 2019 10:18 pm

It should be noted that the consequences of having a trust beneficiary fail qualification or having your estate as the beneficiary of a qualified plan are more severe than having these failures for an inherited IRA.

For an inherited IRA, the executor or trustee can generally assign the IRA to the beneficiaries. From these inherited IRAs, the stretch will be limited, but at least a lump sum distribution will be averted.

For an inherited 403b or 401k, when there is a non qualified trust or estate as beneficiary, a direct rollover to an inherited IRA is not allowed. Further, these plans will likely require a lump sum distribution with it's tax consequences.

Note that qualification for a trust beneficiary is not determined solely by what the trust provisions are. The trustee has a deadline to supply trust info to the plan administrator or IRA custodian and if the trustee misses that deadline, the trust will not be qualified.

Topic Author
Teague
Posts: 1522
Joined: Wed Nov 04, 2015 6:15 pm

Re: Trust 403(b) beneficiary question

Post by Teague » Tue Aug 13, 2019 8:21 am

Alan S. wrote:
Mon Aug 12, 2019 10:18 pm
It should be noted that the consequences of having a trust beneficiary fail qualification or having your estate as the beneficiary of a qualified plan are more severe than having these failures for an inherited IRA.

For an inherited IRA, the executor or trustee can generally assign the IRA to the beneficiaries. From these inherited IRAs, the stretch will be limited, but at least a lump sum distribution will be averted.

For an inherited 403b or 401k, when there is a non qualified trust or estate as beneficiary, a direct rollover to an inherited IRA is not allowed. Further, these plans will likely require a lump sum distribution with it's tax consequences.

Note that qualification for a trust beneficiary is not determined solely by what the trust provisions are. The trustee has a deadline to supply trust info to the plan administrator or IRA custodian and if the trustee misses that deadline, the trust will not be qualified.
Thank you, that's very important info that I did not know!
Semper Augustus

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