Should I Name a Trust as a Retirement Account Beneficiary?
You may have worked hard throughout your lifetime to set yourself up nicely for retirement. Well, it is more common than you may think that retirees do not even come close to using all the funds saved in their retirement account before they, sadly, pass away. This is why it is important to list beneficiaries to inherit these accounts. Usually, listed beneficiaries are actual individuals the retiree was close to. But other times, the retiree may name an entity, such as a trust. With that being said, continue reading to learn why you should name a trust as your retirement account beneficiary and how one of the experienced Butler County trust attorneys at Heritage Elder Law & Estate Planning, LLC can help you discern whether this is the best decision for you to make.
Why should I name a trust as a retirement account beneficiary?
If you are married, you may assume it is the most logical and appropriate decision to name your surviving spouse as your retirement account beneficiary. However, one of the main reasons you would choose a trust instead is so that your surviving spouse may avoid estate tax issues in the future. Specifically, your surviving spouse may receive the balance of your retirement account as a lump sum payment. With this, the Internal Revenue Service (IRS) may consider this lump sum payment as ordinary income. Therefore, the IRS may impose substantial taxes on it, especially if the balance and income are exceptionally high.
This is all to say that it may work out better if you name a trust as the beneficiary of your retirement account and subsequently designate your surviving spouse as the beneficiary of your trust. Briefly, just some of the benefits to this may be tax-free distributions, lower income tax rates, deferred income tax payments, and much more.
What are circumstances in which I should avoid making a trust my beneficiary?
Namely, it may not be in your best interest to make a trust the beneficiary of your retirement account if you have subsequently named multiple beneficiaries to your trust. This is because, in this case, your retirement account funds may be subject to minimum distribution payouts. These minimum distribution payouts are calculated based on the life expectancy of your oldest beneficiary.
This may not be good if your beneficiaries drastically range in age from, let’s say, your surviving spouse to your surviving grandchild. Your minor beneficiary’s distributions may not be spaced out well. This may be especially concerning if you do not quite trust them in handling their own finances just yet.
At the end of the day, if you have any lingering doubts about your estate planning decisions, one of the skilled Butler County estate planning & probate attorneys can help relieve them. So whenever you are ready to start, please reach out to Heritage Elder Law & Estate Planning, LLC.
