Should Your Trust be the Beneficiary of Your 401K?

One common question our clients ask is whether they should name their revocable living trust as the beneficiary of their 401k or other retirement account. There are several factors that should be considered, including the tax consequences of doing so. The Pension Protection Act of 2005 was passed by Congress providing that a revocable trust is eligible to be the beneficiary of a retirement plan.

The primary benefit of appointing a revocable trust as the beneficiary of your retirement plan is that it provides the ability to control the distribution of the proceeds from the retirement plan when the holder of the account dies. Additionally, it helps you avoid some of the problems that can otherwise arise, including:

  • Money held in a retirement account is generally protected from claims by creditors. However, if your retirement account does not have a surviving beneficiary and the default beneficiary is the estate of the account holder, the retirement funds could be vulnerable to claims by the deceased account holder’s creditors.
  • When a person is named as the beneficiary and he/she dies before the account holder, it can cause complications that a trust does not have. In fact we can’t predict the result unless we read the account documents, and each one are different.
  • Naming an individual as the beneficiary can result in the retirement proceeds ending up in an unintended person’s hands. For example, the named beneficiary could go through a divorce or have creditors trying to collect from him/her. Once your retirement proceeds transfer to the beneficiary, it is subject to attack by creditors and/or a divorcing spouse.
  • Retirement account funds left to an estate do not receive favorable IRS treatment and beneficiaries lose important options. If properly drafted, a trust can preserve those options and allows for favorable tax treatment.

If you have a trust and you are considering naming it as the beneficiary of your 401(k), IRA or other retirement account, we can answer your questions. We can also help you create a trust that can protect your assets and ensure that the right people (your loved ones) end up with your estate, and preserve the tax options available to you.

The Astill Law Office has provided high quality legal services for over 30 years. We specialize in wills, trusts, estate planning, and asset protection. If you have any questions about creating a Trust, Will, or estate planning in general, contact The Astill Law Office at 801-438-8698.