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Wealth Management - August 2017

by Stacy Wise | Aug 17, 2017

Should You Name a Trust as Beneficiary of your Retirement Plan or IRA?

By Rick Imhoff, CFP ®

A growing issue for individuals planning the disposition of their estate at death is how to control the distribution of retirement plan or IRA assets to their beneficiaries.  Typically, an individual as account owner will designate primary and contingent beneficiaries.  Upon the account owner’s death, the named beneficiary has the option to either take a lump sum distribution or spread the distribution over a period of years.  The account owner has no say in how the funds will be distributed.

From an income and estate planning perspective, the account owner may desire to control the distribution.  For example, the beneficiaries may be minor children, adult children with special needs, or just incapable of wisely managing money.  In these circumstances, a longer or varied distribution rate may be more desirable or appropriate.

One viable option for an account owner to control the disposition of these assets is to name a trust as beneficiary.  Various IRS rulings and revised minimum distributions rules have made the designation of trusts as beneficiary a far more attractive option than before, but it must be done right.

To achieve the benefits of naming a trust as beneficiary, the trust must be considered a “qualifying trust.”  This can be accomplished by the trust meeting four basic criteria:  be valid under state law, be irrevocable at the death of the account owner, have identifiable “human” beneficiaries, and satisfy documentation requirements.

By meeting these basic criteria, the administrator handling the retirement plan or IRA can “look through” the trustee to the trust’s named beneficiaries as though they had been named as direct beneficiaries by the account owner.  But the difference is that now the account owner can maintain control over the distribution to the named beneficiaries.

For clarification, many individuals establish a revocable living trust as their primary estate planning document.  These types of trusts can be named as beneficiary of a retirement plan or IRA and they would still be considered a “qualifying trust” because they become irrevocable at the account owner’s death.

Also, “human” beneficiaries refer to people and not entities.  Estates, charities and corporations can of course be named as a beneficiary, but they do not meet the criteria for a “qualifying trust.”

While nearly any trust can be named a beneficiary of a retirement plan or IRA, being a “qualifying trust” enables the trust to take advantage of the IRS minimum distribution rules.  But the trustee is not required to pass on more than the minimum distribution, which can help prevent the beneficiaries from rapidly depleting the retirement plan or IRA.  If the trust is not qualified, then the distributions are made under less favorable payout rates.

Several factors must be considered before making this arrangement, including the size of the estate, the spouse’s age, the number of beneficiaries and their ages, and how large the retirement plan or IRA assets are in comparison to other estate assets.  If you have a large estate, you may want to name your spouse as the primary beneficiary and the children as contingent beneficiaries, which may help to significantly reduce income and estate tax liabilities, as compared to naming the trust as the primary beneficiary.

Careful planning and drafting of the trust document is essential.  You will need to check with the administrator of your retirement plan to determine if you can name a trust as beneficiary.  If you are considering naming a charity as one of your beneficiaries, keep in mind that for a trust to be a “qualifying trust” it must name “human” beneficiaries.

Naming a trust as a beneficiary of your retirement plan or IRA can be an effective estate planning tool, but like all estate planning strategies, it must be compared with other options and carefully designed.

Rick Imhoff, CFP®, is Senior Vice President & Senior Trust Officer for MidAmerica National Bank. He can be reached at 309-647-5000, ext. 1130 or by email.

Investments are not FDIC-insured, hold no bank guarantee, may lose value, are not a deposit, and are not insured by any federal government agency.

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