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Trusts As Beneficiaries Of Retirement Plan

Written by: Steven J. Fromm, J.D., LL.M. (Taxation)

In certain situations it may be advisable to have a trust named as beneficiary of retirement plans or IRAs. There are many factors and trade offs if a trust is so utilized.

For example, in certain situations a child is unable to handle the distributions from these plans and the receipt of such amounts directly may not make sense. A trust may provide needed financial protection for such a child.

However trusts have their own particular income tax implications that need to be considered when making a determination as to whether to utilize a trust as a beneficiary of retirement plans.

In any event, once it is determined that a trust is to be used as a named beneficiary of a retirement plan or IRA, the trust needs to be a "qualified beneficiary" under federal tax rules by meeting the following four criteria:

Trust Must Be Valid Under State Law

Federal tax rules require that the trust must be valid under the laws of the state in which it is created. Having your estates attorney draft the trust will ensure that this requirement is met.

Trust Must Be Irrevocable or Will Become Irrevocable

The trust must be irrevocable or will become irrevocable by its terms upon the death of the participant. This requirement can be easily met when the trust is drafted correctly by experienced estate counsel.

Beneficiaries of Trust Must Be Identifiable

The beneficiaries of the trust must be identifiable from the trust instrument. For example, if later born beneficiaries can not be identified or are uncertain, this requirement will not be met. Care is required in drafting the contingent provisions of the trust to meet this federal requirement.

All Trust Beneficiaries Must Be Individuals

Federal tax rules require that all trust beneficiaries must be individuals. The trust can not have charitable beneficiaries or another trust as a beneficiary.

Documentation Must Be Provided To Plan Administrator

Certain documentation must be provided to the plan administrator. This is the easiest of all of these requirements to meet.

Warning

The use of a trust as a beneficiary may be appropriate in certain situations. However, because of how trusts are taxed, there may be an income tax cost associated with this option. This tax trade-off may be well worth it to protect the retirement plan assets and to provide financial security for loved ones.

This matter should be explored with an estate or tax attorney to see if it makes sense in your particular situation and to have this trust drafted correctly and to meet the particular distribution goals desired.

Please contact us if you have any questions or if we can be of any assistance.

Patrick, Oct 12, 2011: "Steven has been instrumental in helping my partner and I to create a secure and satisfying estate plan, which meets or exceeds all of our wishes and contains contingencies for everything from medical issues to wealth management and living wills. In this process, Steven has also become a friend. If you need Estate Planning, Tax Advice, a Will or a trust, etc., we highly recommend Steven Fromm, Esquire. He will listen and be sensitive to your unique situation."

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