Should I name my trust as the beneficiary of my retirement accounts?
In our last post, we discussed the importance of funding your trust and outlined the process for updating various assets.
One of the most complicated issues for clients is how to handle retirement assets. It’s possible to name your trust as the beneficiary of your retirement plan death benefits and to allow the Trustee to administer these benefits as part of the trust funds. This requires the completion of a proper beneficiary designation form that is available from your retirement benefit plan administrator and can often be done online or may need to be mailed in. In some cases, a spouse may need to sign a waiver form as well. Whether to name your trust as the primary beneficiary, however, requires an understanding of applicable tax law and a thorough understanding of the client’s overall objectives.
Beneficiary Designations Control
It’s critical to understand that the beneficiary designation form controls who receives your money after your death. Failure to name a beneficiary will necessitate a probate proceeding. Even worse, a lack of clarity such as the beneficiary predeceasing you or naming multiple people with confusing percentages may lead to a messy battle in court. Even worse than that, not updating the beneficiary designation form after a divorce or family dispute, may be catastrophic. In Egelhoff v. Egelhoff, a famous case before the United States Supreme Court, the Court held that Mr. Egelhoff’s children had no rights in the proceeds of their father’s retirement plan because their father had never removed his ex-wife as the beneficiary of his retirement account after they got divorced. While various state laws may now help avoid this result, needless to say, it’s important to check these forms periodically to ensure they match your intent.
Tax Laws and the Secure Act
Coming to the question of whether to name the trust as the beneficiary of the retirement account requires some basic knowledge of the Tax Code. The tax law allows a surviving spouse to “roll-over” a retirement benefit plan distribution into an IRA, thereby deferring income tax on that distribution until the surviving spouse withdraws or is required to withdraw the benefits. There are, however, other tax and financial implications to rolling over a retirement benefit to an IRA.
The tax law requires that a retirement benefit death plan that is not paid to a surviving spouse of the plan participant must be distributed within five years after the death of the participant unless the beneficiary is a designated beneficiary or an eligible designated beneficiary in which case different rules apply. Distributions to a designated beneficiary may be paid over a ten-year period, and in some cases may be paid over the beneficiary’s life expectancy, if the beneficiary is an “eligible designated beneficiary.” The rules for determining whether the beneficiaries of a trust can be treated as designated beneficiaries are complex and must be weighed against the client’s objectives, the beneficiaries’ ages and financial condition etc.
Further, you must, by your “required beginning date” (usually, but not always, retirement or, if earlier, April 1 after reaching age 72), either provide the plan administrator with a copy of the trust (and all amendments) or a list of all trust beneficiaries (including contingent beneficiaries), together with a description of the portion to which each beneficiary is entitled and any conditions imposed on the beneficial interest. You must certify that the list is accurate and must provide certified statements regarding any subsequent amendments.
Conclusion
Be careful before designating your trust as the primary beneficiary of retirement plan benefits. Consultation with competent tax and financial advisors is strongly urged before completing the beneficiary designation form to ensure that the designations are done properly to meet your estate planning goals. Your plan may involve designating trusts that will be created at your death under your revocable trust or it may involve designating individual beneficiaries outright, or a combination of both. At a minimum, your trust should probably be named as the remote or contingent beneficiary in order to avoid probate in case of a simultaneous death situation with the named beneficiary.
If you have any questions about how your retirement benefits will be paid out based on your estate plan, please feel free to contact our firm about it.