Wills/Trusts - Retirement Account Beneficiary

[UPWanderer]

Hello,

I've previously posted on will and trust creation and received wonderful help.

I have engaged a lawyer and we are working through the details of how to handle the different assets. My lawyer is advising having the trust named as beneficiary for all of our retirement accounts. I have heard that this is not the best but I am unsure why. We have young children and would prefer them not receive large distributions at 18. Please advise and thank you.


Specifically:

Who should be the beneficiary of retirement accounts and why? - children or trust
Does it matter whether or not it is a roth account or a deferred account?

UPWanderer

[ionball]

One advantage of the method your lawyer suggests is that it would aggregate all of the retirement accounts and keep everything proportional for distribution to the beneficiaries. That can reduce ongoing adjustments to the individual account beneficiary percentages as time progresses and balances change. It may be preferable especially if you have several retirement accounts with disparate balances.

[Steelersfan]

When our kids were young everything went into a trust for their benefit via will. When they became adults we dropped the trusts and everything is passed by beneficiary for retirement accounts and by will for everything else.

[RyeBourbon]

I was advised to name my spouse as the beneficiary and my living trust as the contingent (secondary) beneficiary to cover the possibility that we go at the same time.

[Lee_WSP]

If you leave it to your children, they will receive the lump sum with no strings attached. You said you don’t want to do that.

Here’s an article that may shed light on the two common options.

https://www.natlawreview.com/article/se ... d-iras?amp

[Duckinator]

Seems like I recently read where distributions made out of an IRA (ordinary income) which is held inside a trust are taxed at rates of 37% for amounts over $12,900. Thus the reader was advised to not make the trust a beneficiary of an tIRA. If your kids are the beneficiary, they have 10 years to deplete the tIRA at their income tax rates.

[Lee_WSP]

Seems like I recently read where distributions made out of an IRA (ordinary income) which is held inside a trust are taxed at rates of 37% for amounts over $12,900. Thus the reader was advised to not make the trust a beneficiary of an tIRA. If your kids are the beneficiary, they have 10 years to deplete the tIRA at their income tax rates.

That’s an accumulation trust. The other type is the conduit or pass through.

[UPWanderer]

Thank you for the replies. The link is very informative. It is correct that we do not want to leave lump sum. We are worried (perhaps incorrectly) on tax consequences, as Duckinator mentioned, if it goes to trust.

Are there different tax liabilities if retirement accounts go to trust? The accounts we have are:

403B
457
401K
IRA
Roth IRA's

From the link, it appears to me that the trust would have 10 years to distribute the funds without tax penalty. Is this correct? For reference our oldest child is 8 and we are still having kids so the 10 year window seems very short if something awful happened in near term.

UPWanderer

[Lee_WSP]

https://www.kiplinger.com/retirement/re ... re-act?amp

https://www.kitces.com/blog/secure-act- ... neficiary/

[FlyEaglesFly2000]

Would the same principle apply to life insurance proceeds as the retirement accounts? i.e. Naming a trust as the beneficiary instead of (minor) children individually?

[Bobby206]

In my opinion:
Spouse primary and trust as contingent. Once kids are 25 or 30 (or otherwise very mature) then I would make them contingent bene. I would have trust as contingent bene until then.

I personally prefer having a smart/very mature trustee in charge of the funds until kids are older. 25 or 30 at a minimum. There's a big difference between being mature enough to live on your own and mature enough to handle having a large sum of money burning a hole in your pocket.

[Bobby206]

Would the same principle apply to life insurance proceeds as the retirement accounts? i.e. Naming a trust as the beneficiary instead of (minor) children individually?

Always have trust as bene of life insurance as there are no tax consequences involved. Also, in the rare instance (I have seen it so it happens) that a beneficiary dies before making a claim on the life insurance it avoids a probate.

[FlyEaglesFly2000]

Would the same principle apply to life insurance proceeds as the retirement accounts? i.e. Naming a trust as the beneficiary instead of (minor) children individually?

Always have trust as bene of life insurance as there are no tax consequences involved. Also, in the rare instance (I have seen it so it happens) that a beneficiary dies before making a claim on the life insurance it avoids a probate.

Good point. Thanks!

[Lee_WSP]

Would the same principle apply to life insurance proceeds as the retirement accounts? i.e. Naming a trust as the beneficiary instead of (minor) children individually?

The only downside of naming a trust is you have to have a trust or create a trust specifically for that person. It may not be worth the cost.

To get past the issue of pre deceasing, you name your living trust (assuming you have one) as the backup beneficiary.

The downside to naming the trust as a direct beneficiary is if you took out the policy for a specific person who now has to share the benefits with the other beneficiaries in the trust.

Ie, this is a complex topic and there are a lot of moving parts. The most important consideration is why you have the policy to begin with and what would best serve the underlying goals.

[FlyEaglesFly2000]

Would the same principle apply to life insurance proceeds as the retirement accounts? i.e. Naming a trust as the beneficiary instead of (minor) children individually?

The only downside of naming a trust is you have to have a trust or create a trust specifically for that person. It may not be worth the cost.

To get past the issue of pre deceasing, you name your living trust (assuming you have one) as the backup beneficiary.

The downside to naming the trust as a direct beneficiary is if you took out the policy for a specific person who now has to share the benefits with the other beneficiaries in the trust.

Ie, this is a complex topic and there are a lot of moving parts. The most important consideration is why you have the policy to begin with and what would best serve the underlying goals.

I'm working with an attorney now on our estate documents. The suggestion was to make the secondary beneficiary (after spouse) be "my estate." If my spouse and I both die, our minor children will receive all proceeds of the estate. If I make "my estate" the beneficiary of 401k plans and life insurance, wouldn't those proceeds then go into the trust that will be created (per the will) for the kids to hold all other assets. Or, do we need a trust in place ahead of time to receive these assets. Not planning to do a living trust as this point.

[Lee_WSP]

Would the same principle apply to life insurance proceeds as the retirement accounts? i.e. Naming a trust as the beneficiary instead of (minor) children individually?

The only downside of naming a trust is you have to have a trust or create a trust specifically for that person. It may not be worth the cost.

To get past the issue of pre deceasing, you name your living trust (assuming you have one) as the backup beneficiary.

The downside to naming the trust as a direct beneficiary is if you took out the policy for a specific person who now has to share the benefits with the other beneficiaries in the trust.

Ie, this is a complex topic and there are a lot of moving parts. The most important consideration is why you have the policy to begin with and what would best serve the underlying goals.

I'm working with an attorney now on our estate documents. The suggestion was to make the secondary beneficiary (after spouse) be "my estate." If my spouse and I both die, our minor children will receive all proceeds of the estate. If I make "my estate" the beneficiary of 401k plans and life insurance, wouldn't those proceeds then go into the trust that will be created (per the will) for the kids to hold all other assets. Or, do we need a trust in place ahead of time to receive these assets. Not planning to do a living trust as this point.

I’m not sure that’s necessary, but not a bad idea, as the default backup option is your estate.

Well, your estate will go through probate and the judge will create a trust in line with your wishes if feasible. How the retirement accounts will be disposed of is not known to me, but you can leave instructions on that too.

[bsteiner]

...
I have engaged a lawyer and we are working through the details of how to handle the different assets. My lawyer is advising having the trust named as beneficiary for all of our retirement accounts. I have heard that this is not the best but I am unsure why. We have young children and would prefer them not receive large distributions at 18. Please advise and thank you.
...
Who should be the beneficiary of retirement accounts and why? - children or trust

Does it matter whether or not it is a roth account or a deferred account?
...

You didn't say anything about a spouse. If you have a spouse, you might want to name your spouse as the primary beneficiary, so he/she can roll the benefits over into his/her own IRA and defer the distributions.

If you don't have a spouse (or if your spouse predeceases you, or if for some reason you don't want to leave your retirement benefits to your spouse, you would probably leave them to your children in separate trusts for their benefit.

Under the SECURE Act, retirement benefits generally have to be distributed by the end of the tenth calendar year following death. However, your minor children may still use the life expectancy stretch during minority (which includes the period until they complete a specified course of education (we don't yet know what that means), but not beyond age 26. At that point, the 10-year rule applies. You thus have two options. One is to leave each child's share in a conduit trust (which means that the trustees must distribute any amounts received from the IRA to the child on a current basis). We think that a conduit trust gets the same stretch that the child would get. If that's correct, then depending on how long the child is in school, that could defer distribution until the child is 36. However, the child would get the money outright by 36 at the latest. The other choice is to leave the retirement benefits to the children in discretionary trusts for their benefit. That has the advantage of providing asset protection beyond age 36. However, it limits the stretch to 10 years following your death. So far, while the sample size is small, our clients with minor children have chosen discretionary trusts.

What is "the" trust?

Would the same principle apply to life insurance proceeds as the retirement accounts? i.e. Naming a trust as the beneficiary instead of (minor) children individually?

The SECURE Act (discussed above) doesn't apply to life insurance. You could leave the life insurance (as well as your other nonretirement assets) to your children in separate discretionary trusts without regard to the required distribution rules for retirement benefits.

...
I'm working with an attorney now on our estate documents. The suggestion was to make the secondary beneficiary (after spouse) be "my estate." If my spouse and I both die, our minor children will receive all proceeds of the estate. If I make "my estate" the beneficiary of 401k plans and life insurance, wouldn't those proceeds then go into the trust that will be created (per the will) for the kids to hold all other assets. Or, do we need a trust in place ahead of time to receive these assets. Not planning to do a living trust as this point.

That's what happens with your assets other than your life insurance and retirement benefits. But it doesn't work well for life insurance or retirement benefits. It destroys the creditor protection. Also, in the case of retirement benefits, it subjects them to the 5-year rule rather than the 10-year rule. You could avoid these issues by making the trusts under your Will for your children the secondary beneficiaries of your retirement benefits.

A minor detail: you'll need a second set of trusts for your children for the retirement benefits, identical to their trusts for your other assets, except with a few additional provisions to make sure they qualify for the 10-year rule rather than the 5-year rule.

...
your estate will go through probate and the judge will create a trust in line with your wishes if feasible. How the retirement accounts will be disposed of is not known to me, but you can leave instructions on that too.

The court doesn't create the trusts for your children. You create them in your Will.

Your retirement benefits payable to the trusts under your Will for your children won't be probate assets. They'll remain exempt from your creditors to the extent they're exempt from your creditors during your lifetime.

[FIREchief]

The other choice is to leave the retirement benefits to the children in discretionary trusts for their benefit. That has the advantage of providing asset protection beyond age 36. However, it limits the stretch to 10 years following your death.

Is this a new development? Why wouldn't a qualified accumulation trust still allow the same stretches as a conduit trust for minor children?

[bsteiner]

The other choice is to leave the retirement benefits to the children in discretionary trusts for their benefit. That has the advantage of providing asset protection beyond age 36. However, it limits the stretch to 10 years following your death.

Is this a new development? Why wouldn't a qualified accumulation trust still allow the same stretches as a conduit trust for minor children?

There are lots of open questions under the SECURE Act. We're hoping for guidance from the IRS. But in the meantime, the consensus (which could turn out wrong) seems to be that a conduit trust for an eligible designated beneficiary (EDB) qualifies for the life expectancy stretch to the same extent as if the benefits were payable to the EDB directly, but that, with the exception discussed in the next paragraph, a discretionary (accumulation) trust doesn't.

The exception is that a discretionary trust for a disabled or chronically ill beneficiary qualifies for the life expectancy stretch so long as all of the current beneficiaries are disabled or chronically ill. In most cases, that will mean a discretionary trust for the particular disabled or chronically ill person.

[Lee_WSP]

...
your estate will go through probate and the judge will create a trust in line with your wishes if feasible. How the retirement accounts will be disposed of is not known to me, but you can leave instructions on that too.

The court doesn't create the trusts for your children. You create them in your Will.

What he said. It's an interesting process, but the will is probated and then the assets are distributed (hence my shorthand comment about the judge "creating" it (releasing the assets would be more accurate)). Here's a self help overview from the state of CA.

https://www.scscourt.org/self_help/prob ... ting.shtml

[FIREchief]

The other choice is to leave the retirement benefits to the children in discretionary trusts for their benefit. That has the advantage of providing asset protection beyond age 36. However, it limits the stretch to 10 years following your death.

Is this a new development? Why wouldn't a qualified accumulation trust still allow the same stretches as a conduit trust for minor children?

There are lots of open questions under the SECURE Act. We're hoping for guidance from the IRS. But in the meantime, the consensus (which could turn out wrong) seems to be that a conduit trust for an eligible designated beneficiary (EDB) qualifies for the life expectancy stretch to the same extent as if the benefits were payable to the EDB directly, but that, with the exception discussed in the next paragraph, a discretionary (accumulation) trust doesn't.

The exception is that a discretionary trust for a disabled or chronically ill beneficiary qualifies for the life expectancy stretch so long as all of the current beneficiaries are disabled or chronically ill. In most cases, that will mean a discretionary trust for the particular disabled or chronically ill person.

Thanks Bruce. We're way past having minor children, but I do try to keep up with the latest developments/interpretations with respect to trusts that may be designated as beneficiaries of qualified retirement accounts. I'm still leaning towards the optimal scenario being a non-qualified trust as designated beneficiary of Roth assets (with five year distribution from inherited Roth IRA(s)).

[Lee_WSP]

The other choice is to leave the retirement benefits to the children in discretionary trusts for their benefit. That has the advantage of providing asset protection beyond age 36. However, it limits the stretch to 10 years following your death.

Is this a new development? Why wouldn't a qualified accumulation trust still allow the same stretches as a conduit trust for minor children?

There are lots of open questions under the SECURE Act. We're hoping for guidance from the IRS. But in the meantime, the consensus (which could turn out wrong) seems to be that a conduit trust for an eligible designated beneficiary (EDB) qualifies for the life expectancy stretch to the same extent as if the benefits were payable to the EDB directly, but that, with the exception discussed in the next paragraph, a discretionary (accumulation) trust doesn't.

The exception is that a discretionary trust for a disabled or chronically ill beneficiary qualifies for the life expectancy stretch so long as all of the current beneficiaries are disabled or chronically ill. In most cases, that will mean a discretionary trust for the particular disabled or chronically ill person.

Thanks Bruce. We're way past having minor children, but I do try to keep up with the latest developments/interpretations with respect to trusts that may be designated as beneficiaries of qualified retirement accounts. I'm still leaning towards the optimal scenario being a non-qualified trust as designated beneficiary of Roth assets (with five year distribution from inherited Roth IRA(s)).

Here's a more in depth article from Kitces on the subject.

https://www.kitces.com/blog/discretiona ... uidelines/

[mptness]

So far, while the sample size is small, our clients with minor children have chosen discretionary trusts.

So is there any advantage with adult children who are non eligible (30 years old +} for using a trust vs. just naming them as IRA beneficiaries?

[Lee_WSP]

So far, while the sample size is small, our clients with minor children have chosen discretionary trusts.

So is there any advantage with adult children who are non eligible (30 years old +} for using a trust vs. just naming them as IRA beneficiaries?

Well, if you have concerns about their financial acuity or addiction or spouse or any of numerous issues, the discretionary (spendthrift) trust will allow you to control their inheritance, but after 10 years it may all get distributed into the trust at the 37% tax rate.

[FIREchief]

So far, while the sample size is small, our clients with minor children have chosen discretionary trusts.

So is there any advantage with adult children who are non eligible (30 years old +} for using a trust vs. just naming them as IRA beneficiaries?

Well, if you have concerns about their financial acuity or addiction or spouse or any of numerous issues, the discretionary (spendthrift) trust will allow you to control their inheritance, but after 10 years it may all get distributed into the trust at the 37% tax rate.

Unless it's Roth money, which would enter the trust tax free.

[FIREchief]

The other choice is to leave the retirement benefits to the children in discretionary trusts for their benefit. That has the advantage of providing asset protection beyond age 36. However, it limits the stretch to 10 years following your death.

Is this a new development? Why wouldn't a qualified accumulation trust still allow the same stretches as a conduit trust for minor children?

There are lots of open questions under the SECURE Act. We're hoping for guidance from the IRS. But in the meantime, the consensus (which could turn out wrong) seems to be that a conduit trust for an eligible designated beneficiary (EDB) qualifies for the life expectancy stretch to the same extent as if the benefits were payable to the EDB directly, but that, with the exception discussed in the next paragraph, a discretionary (accumulation) trust doesn't.

The exception is that a discretionary trust for a disabled or chronically ill beneficiary qualifies for the life expectancy stretch so long as all of the current beneficiaries are disabled or chronically ill. In most cases, that will mean a discretionary trust for the particular disabled or chronically ill person.

Thanks Bruce. We're way past having minor children, but I do try to keep up with the latest developments/interpretations with respect to trusts that may be designated as beneficiaries of qualified retirement accounts. I'm still leaning towards the optimal scenario being a non-qualified trust as designated beneficiary of Roth assets (with five year distribution from inherited Roth IRA(s)).

Here's a more in depth article from Kitces on the subject.

https://www.kitces.com/blog/discretiona ... uidelines/

That executive summary absolutely butchers the Roth conversion strategies outlined in the actual article.

[bsteiner]

So far, while the sample size is small, our clients with minor children have chosen discretionary trusts.

So is there any advantage with adult children who are non eligible (30 years old +} for using a trust vs. just naming them as IRA beneficiaries?

The benefits are that it keeps it out of their estates, and protects it against their creditors and spouses, and Medicaid. The tradeoff is that trusts are usually taxable at higher rates, especially now that the benefits generally have to be distributed by the end of the tenth calendar year following death.

As a result, Roth conversions will more often make sense.

If the child is at least 27, is likely to need distributions, and is unlikely to have a taxable estate, get divorced, or have a creditor problem, and if there are other assets available for one-off needs, a charitable remainder trust for the child, and then charity, is a way to replicate the stretch. The additional deferral will often offset or even outweigh the loss of the remainder interest to charity.

[Lee_WSP]

Is this a new development? Why wouldn't a qualified accumulation trust still allow the same stretches as a conduit trust for minor children?

There are lots of open questions under the SECURE Act. We're hoping for guidance from the IRS. But in the meantime, the consensus (which could turn out wrong) seems to be that a conduit trust for an eligible designated beneficiary (EDB) qualifies for the life expectancy stretch to the same extent as if the benefits were payable to the EDB directly, but that, with the exception discussed in the next paragraph, a discretionary (accumulation) trust doesn't.

The exception is that a discretionary trust for a disabled or chronically ill beneficiary qualifies for the life expectancy stretch so long as all of the current beneficiaries are disabled or chronically ill. In most cases, that will mean a discretionary trust for the particular disabled or chronically ill person.

Thanks Bruce. We're way past having minor children, but I do try to keep up with the latest developments/interpretations with respect to trusts that may be designated as beneficiaries of qualified retirement accounts. I'm still leaning towards the optimal scenario being a non-qualified trust as designated beneficiary of Roth assets (with five year distribution from inherited Roth IRA(s)).

Here's a more in depth article from Kitces on the subject.

https://www.kitces.com/blog/discretiona ... uidelines/

That executive summary absolutely butchers the Roth conversion strategies outlined in the actual article.

Sometimes I wonder if the executive summaries are written by different people like how the judicial summaries are written by the clerks.

[UPWanderer]

Thank you all for the replies but I have a few additional questions:

We are setting up a living trust currently; some of the responses speak to a trust for each child. This sounds like a different direction than a living trust, yes?

If there are separate trusts, do all assets go into those trusts? Or, are there different trusts for different assets as well as different children?

I'm also looking to confirm that tax consequences though real; should likely not be considered with minor children. I'm thinking when kids are around 30 we would then add them as beneficiaries directly potentially to avoid the tax consequences. I'm inferring this from the conversation, does this sound right?

Thank you,

UPWandrer

[bsteiner]

Each child will have a separate trust. (Some people create a single trust for their children, which divides into separate trusts when the youngest child reaches a specified age.) Usually the children's trusts are in the Will. If you're creating a revocable trust, they would instead be in the trust agreement by which you're creating the revocable trust.

Since there are some special rules for trusts that receive retirement benefits, each child will usually have a separate trust for his/her share of the retirement benefits. These would usually be in the Will, but if you're creating a revocable trust they would be in the trust agreement by which you're creating the revocable trust.

[RyeBourbon]

Thank you all for the replies but I have a few additional questions:

We are setting up a living trust currently; some of the responses speak to a trust for each child. This sounds like a different direction than a living trust, yes?

I can't really comment on the tax issues, but my (and my spouse's) RLT is for our benefit while living. A pour over will funds the trust upon death with the surviving spouse as the trustee and then once we are both gone, our oldest child (now age 30) is the trustee until all children reach the age of 23. Then the trusts are divided equally into individual trusts for the children. The oldest (arbitrary choice, we have specified my BIL as an alternate) is the trustee for each trust until the beneficiary reaches 25 at which time they can be co-trustee and then can be the only trustee at age 30.

At least that's the way I remember it being explained when set up three years ago.