A:

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."

RELATED FAQS
  1. How can I put my IRA in a trust?

    Understand the proper way to transfer ownership of your IRA to a trust. Consider the advantages and disadvantages of naming ... Read Answer >>
Related Articles
  1. 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.
  2. 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.
  3. Retirement

    The Importance of Updating Retirement Account Beneficiaries

    Retirement account beneficiaries should be reviewed and updated on a regular basis to avoid any outdated information. This prevent any confusion in a time of loss.
  4. 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.
  5. Retirement

    A Look At IRA Separate Accounting Rules

    If you are a younger multiple beneficiary, make sure you understand the RMD regulations.
  6. 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.
  7. 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.
  8. Personal Finance

    Do Retirement Accounts Go Through Probate?

    It's tough when retirement accounts have go through probate, tying up those funds after death. Here is how you can prevent that from happening.
RELATED TERMS
  1. Primary Beneficiary

    A primary beneficiary is the first person in line to receive ...
  2. Alternate Beneficiary

    An alternate beneficiary is a term used for the individual who ...
  3. Beneficial Interest

    A beneficiary interest refers to an individual's right to benefit ...
  4. Revocable Beneficiary

    A revocable beneficiary can expect but is not guaranteed payouts ...
  5. Secondary Beneficiary

    A secondary beneficiary is a person or entity that inherits assets ...
  6. Irrevocable Beneficiary

    An irrevocable beneficiary has guaranteed rights to assets in ...
Trading Center