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. 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. Financial Advisor

    How to Handle Client Beneficiary Designations

    Beneficiary designations are a critical financial planning step that can be easily overlooked. Here's how to ensure they are properly done.
  5. 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.
  6. 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.
  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

    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.
  9. Retirement

    An Estate Planning Must: Update Your Beneficiaries

    Life changes make it time to rewrite your plan's designations.
RELATED TERMS
  1. Primary Beneficiary

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

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

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

    In a will, an alternate beneficiary is usually named in case ...
  5. Contingent Beneficiary

    1. A beneficiary specified by an insurance contract holder who ...
  6. Life Estate

    A type of estate that only lasts for the lifetime of the beneficiary. ...
Hot Definitions
  1. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  2. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  3. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  4. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
  5. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  6. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
Trading Center