In the financial community, this has been a topic of an ongoing debate between estate planning attorneys and financial advisors. For retirement accounts, investors are given the opportunity to name both primary and contingent beneficiaries – that is, the person or entity who will inherit the account to upon the original owner's death. Since qualified retirement plans (such as a 401(k) or 403(b), an IRA or a Roth IRA) pass by way of contract directly to a named beneficiary, the often-lengthy probate process, attorneys' fees and other costs associated with wills and settling estates are avoided.

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 its assets becoming part of a surviving spouse's estate in an effort to avoid 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, which are calculated based on the life expectancy of the oldest beneficiary. If there's only one, it doesn't matter, but it can be problematic if there are several heirs of varying ages: The ability to maximize the deferral potential of the qualified plan interest is lost under this approach. In contrast, naming individual beneficiaries will allow each beneficiary to take an RMD based on their life expectancy, which can stretch an IRA's earnings out for a longer period of time.

While the IRA owner is alive, only the IRA owner can change the designated beneficiary of the IRA. Exceptions may apply if there is an attorney-in-fact, in which a power of attorney includes provisions that appoint that agent to act on the IRA owner's behalf. Similar exceptions apply to conservators, who can be appointed by a court to take care of legal matters for an IRA owner who is unable to do so.

After the IRA owner's death, the designated beneficiary, including a trust beneficiary, has the option of disclaiming the inherited assets. If the disclaimer is qualified, the assets will generally pass to the contingent beneficiary. If there is no other primary or contingent beneficiaries, the beneficiary will be determined according to the default provisions of the IRA plan document.

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

  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. If both the primary and contingent beneficiaries are unavailable, what happens to ...

    Understand the difference between primary and contingent beneficiaries and what happens to assets when neither are present ... 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

    Mistakes in Designating a Retirement Beneficiary

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

    The Importance of Updating Retirement Account Beneficiaries

    Why retirement account beneficiaries should be reviewed and updated on a regular basis.
  5. 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.
  6. Retirement

    Why You Need to Update Retirement Account Beneficiaries

    The designation of beneficiaries in retirement accounts takes precedence over a will. Don't forget to keep them updated.
  7. Retirement

    3 Deadlines For Retirement Plan Beneficiaries

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

    A Look At IRA Separate Accounting Rules

    If you are a younger multiple beneficiary, make sure you understand the RMD regulations.
  9. 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.
  10. Retirement

    Distribution Rules For Inherited Retirement Plan Assets

    If you've recently inherited a retirement plan, you must get to know the rules for distributing the funds.
  1. Secondary Beneficiary

    A person or entity that inherits assets under a will, trust or ...
  2. Absolute Beneficiary

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

    In a will, an alternate beneficiary is usually named in case ...
  4. Beneficiary Clause

    A beneficiary clause is a provision in a life insurance policy ...
  5. Beneficiary Of Trust

    A beneficiary of trust is the individual or group of people who ...
  6. Five-Year Rule

    The Five-Year Rule allows inherited IRA beneficiaries to withdrawal ...
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center