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Trust as Beneficiaries of Retirement Accounts

October 30, 2020

Deciding who inherits your assets when you’re gone is never an easy decision. While sometimes it may sound as simple as listing your spouse and children equally, there are many other factors to consider including the different tax benefits and distribution rules.

Listing a Trust as your primary beneficiary may give more control to the IRA owner for more complex situations such as: second marriages, spendthrift clauses, beneficiaries with special needs and charitable gifts. However, the tradeoff for greater control may limit distribution and tax planning options.

In some instances, a Trust may serve as a “see-through” Trust where it acts as a mechanism to pass retirement account assets to beneficiaries with more specific instructions. In this situation the retirement account could be distributed in a similar manner as if the beneficiaries were listed directly. In other instances, the Trust may need to be listed as the actual owner of the decedent’s account. In this situation the new retirement account would be subject to different holding periods and distribution rules, and any income may also be taxed at the less-favored Trust tax rates.

It is important that you explore all options available.  How the beneficiaries receive the money may be just as important as who receives the money.