There are times when you may want to name your living trust as beneficiary of your IRA or 401k (i.e., your tax deferred qualified plans) upon your death but there are a lot of rules on this. First, you would want to confirm the reason for naming your trust as beneficiary of your qualified plans. Your qualified plans have beneficiaries that avoid probate in the first place, so the main reason you would want them to go to a trust is so that they are held in trust for a beneficiary. 

One of the main concepts of estate planning with your qualified plans is making sure they "stretch out" to your beneficiaries upon your death. Upon your death, your beneficiaries do not need to withdraw the funds. In fact, the longer the beneficiaries leave the funds in account the longer the funds can grow tax free.  Tax free growth over many years is an amazing way to grow an IRA. The long and short of it is that an individual beneficiary can roll over an IRA into a "beneficiary directed" IRA. The beneficiary can then leave the funds in the IRA, taking out only required minimum distributions over their lifetimes allowing for this amazing growth.

In order for a trust to be able to stretch the IRA out like an individual, the trust must be specifically drafted to recieve the IRA. When correctly drafted, the trust can act as a "see through trust" for IRS purposes, which allows the wonderful stretchout. To qualify as a look-through trust, the following criteria need to be met:

  • Must be valid under state law
  • Must be irrevocable (or revocable while the IRA owner is alive, provided the trust becomes irrevocable upon the individual's death)
  • Must have named identifiable beneficiaries
  • Must provide the plan administrator with either a copy of the trust instrument or qualifying documentation of the trust

If your trust is not drafted correctly to recieve your qualifed plan, the opportunity to leave the funds in the IRA (i.e., to stretchout the funds) may be severely limited. This means that the IRA will have to be distributed out quickly, which creates additional taxes. Essentially, a poorly drafted trust is a wealth killer, not a wealth creator.

You may want to leave assets in a trust for a beneficiary. Perhaps the beneficiary is too young, too irresponsible, has creditor issues, has special needs, is in a troubled marriage or more. If you want to create a trust for someone’s benefit, you can name the trust as beneficiary, but the trust must be drafted the correct way.

I am an expert at drafting IRA Trusts, having spent many, many hours researching, attending seminars, and readings on the subject. I am also a member of Wealthcounsel, which has a great standalone IRA trust.  If you want to leave your IRA or 401k to a trust for a beneficiary’s benefit, we will be glad to assist you.

D. Rep DeLoach III
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Estate Planning and Board Certified Elder Law Attorney