Trust as Retirement Account Beneficiary: Pros and Cons

Designation of a trust as beneficiary for an IRA, 401K, or other retirement account is a popular option for retirement account holders who wish to continue to exert some control over the disposition of their assets following their death. However, account holders will need to exercise some care and attention to detail in order to make sure that the trust is properly designed to insure that their wishes are carried out in the most effective way for all concerned.

The first thing to understand is that if the beneficiary of a retirement account is not a natural person, the payout of assets from the account will become subject to a five-year limitation if the account holder dies before the required beginning date (RBD) for distributions. When this happens in the case of a non-person beneficiary, the IRS disallows use of the deceased account holder’s life expectancy for calculating the annual required minimum distribution (RMD); the assets must be disbursed over no more than a five-year period. If the account holder dies on or after the RBD, the distribution may be stretched only as far as the deceased’s life expectancy as calculated by the IRS.

There is an exception to this rule, however. If the trust is valid under state law; it is irrevocable; the beneficiaries of the trust are identifiable persons; and a copy of the trust documents are provided to the IRS by October 31 of the year immediately following the year of the account holder’s death, then the life expectancy of the oldest identifiable beneficiary of the trust may be used to calculate the RMD.

Why would someone want to designate a trust as beneficiary, instead of just designating a spouse, child, or other person? Several reasons can apply to this decision. Perhaps the most important is protection against a spendthrift beneficiary. For example, the creator of the trust may want to be sure that a grandchild does not use up all the assets before a certain age; the trust can be structured to disburse assets in accordance with this wish. Another reason might involve the grantor’s wish to provide both for a current spouse and children of a previous marriage. A trust can stipulate that the spouse may receive income from the trust and also provide an inheritance for the children.

To avoid creating unforeseen or undesired complications for beneficiaries, care should be taken in using trusts as recipients of retirement accounts. For one thing, the account holder should check with the retirement account custodian to make sure that the provisions of the trust do not conflict with the plan documents and that they pass regulatory muster. As mentioned above, care must be exercised to insure that, upon the account holder’s death, the appropriate documentation is submitted to the IRS by the October deadline; otherwise, the RMD will revert to the five-year minimum term. The trust should be structured so that it cannot disclaim the assets of the plan. When assets are disclaimed, the proceeds may become payable to a primary or contingent beneficiary, and the trust is nullified. This can be avoided by including in the trust documents what is commonly called a “disclaimer provision” that specifies disposition of the assets in accordance with certain trust provisions. Another problem can arise when certain provisions of a trust are in conflict with the retirement plan document. To avoid these and other potential pitfalls, the account holder should consult with a qualified attorney and tax professional, who can help insure that the documents are properly designed to satisfy the account holder’s requirements.

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Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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