A:

This has been the topic of an ongoing debate in the financial community between estate planning attorneys and financial advisors. For retirement accounts, investors are given the opportunity to name both primary and contingent beneficiaries on their accounts. Since retirement accounts (such as an IRA, 401k, Roth IRA, 403b), pass by way of contract (named beneficiary), the probate process and attorneys needed for estate settlement are avoided for the inheritance of these particular accounts.

Naming a Trust as beneficiary is advantageous if your beneficiaries are minors, require special needs or just simply can't be trusted with a large sum of money. Some attorneys will recommend a special trust be established as the IRA beneficiary to avoid the assets becoming part of the surviving spouse's estate in an effort to reduce future estate tax issues.

The primary disadvantage of naming a trust as beneficiary is that the retirement plan assets will be subjected to required minimum distribution (RMD) payouts at the life expectancy of the oldest beneficiary of the trust. The ability to maximize the deferral potential of the IRA or other qualified plan interest is not achieved under this approach. Naming individual beneficiaries will allow each beneficiary to take an RMD based on their life expectancy versus the oldest beneficiary (as required by a trust) which can stretch an IRA out for a longer period of time.

To learn more about beneficiary designations, read Update Your Beneficiaries, Problematic Beneficiary Designations – Part 1 and Problematic Beneficiary Designations – Part 2

RELATED FAQS
  1. Can the non-spouse beneficiary of an IRA name a successor beneficiary?

    Whether the beneficiary of an individual retirement account (IRA) can name a successor beneficiary (second generation beneficiary) ... Read Answer >>
  2. How do I change my contingent beneficiary?

    Learn what life insurance companies and retirement plan accounts require from you to change your contingent beneficiary designations. Read Answer >>
  3. Can an IRA beneficiary roll the IRA over into another account and designate another ...

    It depends on the provision of the IRA plan document. Some (though very few) do not allow the designation of successor beneficiaries. ... Read Answer >>
  4. What does U.S. law say about contingent beneficiaries?

    Learn about regulations the United States has on the naming of contingent beneficiaries, the types of contingencies that ... Read Answer >>
  5. What are the keys to setting up a trust fund?

    Setting up a trust to secure your assets for a beneficiary allows you to set the terms under which the beneficiaries are ... Read Answer >>
Related Articles
  1. Retirement

    Breaking Down IRA Beneficiaries: Part 1

    It's important to give serious consideration to your IRA beneficiary designations.
  2. Financial Advisor

    Why You Need to Find the Right IRA Beneficiary

    It definitely matters who you pick as your IRA beneficiary—and how you go about it. And in some cases, your best option may be to go with a trust.
  3. Retirement

    What You Should Know About IRA Beneficiaries: Part 2

    Here's how IRAs, and the beneficiaries you name, work with wills and trusts.
  4. Retirement

    Who Should Be Your Retirement Account Beneficiary?

    The options for beneficiary of a retirement account generally fall into these five categories.
  5. Retirement

    Mistakes in Designating a Retirement Beneficiary

    Make sure your beneficiary designations not only reflect your intentions but also meet the requirements to be effective.
  6. Retirement

    Who is a Beneficiary?

    A beneficiary is a person or entity that receives funds, assets, property or other benefits from a trust, will, or life insurance policy.
  7. Financial Advisor

    Passing an IRA to a Trust: The Good and Bad

    Creating a trust is a common estate planning tactic, but naming a beneficiary to an IRA to a trust may have unintended consequences.
  8. Retirement

    A Look at Protecting Children With an IRA Trust

    Too many people make huge and irreversible mistakes when naming the beneficiaries for their retirement accounts.
  9. Financial Advisor

    Why Your Will Should Name Designated Beneficiaries

    Find out how to make the tough decisions when it comes to choosing who will receive your assets and how they will be paid out.
RELATED TERMS
  1. Primary Beneficiary

    A beneficiary in a will, trust or insurance policy that is first ...
  2. Named Beneficiary

    This term refers to any beneficiary named in a will, a trust, ...
  3. Absolute Beneficiary

    A designation of a beneficiary that can not be changed without ...
  4. Beneficiary

    Anybody who gains an advantage and/or profits from something. ...
  5. Secondary Beneficiary

    A person or entity that inherits assets under a will, trust or ...
  6. Alternate Beneficiary

    In a will, an alternate beneficiary is usually named in case ...
Hot Definitions
  1. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  2. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  3. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  4. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  5. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  6. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
Trading Center