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. 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 >>
Related Articles
  1. Retirement

    Breaking Down IRA Beneficiaries: Part 1

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

    What You Should Know About IRA Beneficiaries: Part 2

    Here's how IRAs, and the beneficiaries you name, work with wills and trusts.
  3. 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.
  4. Retirement

    3 Deadlines For Retirement Plan Beneficiaries

    To take full advantage of new RMD regulations, beneficiaries need to take action before important deadlines.
  5. Retirement

    An Estate Planning Must: Update Your Beneficiaries

    Life changes make it time to rewrite your plan's designations.
  6. 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.
  7. Retirement

    Designating A Trust As Retirement Beneficiary

    Designating a trust as your IRA beneficiary can be beneficial, but it requires proper planning to avoid problems.
  8. Financial Advisor

    Avoid These 4 Roth IRA Mistakes in Estate Planning

    Beneficiaries will not be able to maximize their tax savings with a Roth IRA unless it is passed down in a certain manner.
  9. Retirement

    Be Smart in Naming Beneficiaries of Your 401(k)

    Listen up: Hidden in the pesky details of filling out 401(k) forms are important tax implications. And it's a legacy to people you love.
RELATED TERMS
  1. Named Beneficiary

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

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

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

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

    In a will, an alternate beneficiary is usually named in case ...
  6. Extended IRA

    An IRA that allows a second generation beneficiary to continue ...
Hot Definitions
  1. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  2. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  3. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  4. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  5. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  6. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
Trading Center