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

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