There are many reasons why a client would want to leave their retirement accounts (IRA’s, 401k’s, TDA’s, etc.) in a trust for the benefit of their heirs. For example, if a beneficiary is under the age of eighteen (18), he/she can not legally inherit. In addition, if the retirement accounts are sizable, most people properly do not want to leave large sums of monies to a young person. One should also consider a trust if a beneficiary is disabled, so that the assets are controlled and protected. Lastly, there may be significant tax reasons for leaving retirement assets to a trust. For example, with a QTIP trust, the surviving spouse would be entitled to all of the income during his/her lifetime, but the principal would beLikewise, if a couple is doing estate planning by using credit shelter trusts created under their wills, the retirement assetspreserved for one’s children or other heirs, and there should be no estate tax issues until the survivor passes away. may need to pass under that trust.
The general rule is that the beneficiary of one’s retirement accounts must be a person or organization, not an estate or trust. If one were to leave those accounts to their estate or trust, the income tax consequences would be quite devastating, as all of the value of those accounts would become immediately income taxable, at the trust/estate tax rate, which is substantially higher than the individual rate.
Pursuant to regulations adopted several years ago, one can leave retirement accounts to a trust, without such severe, adverse tax consequences, if one closely follows the guidelines and requirements set forth by the Internal Revenue Service. In short, you can not just use a financial institution’s beneficiary form and simply write in that a trust is the beneficiary. If one is interested in using trusts to capture retirement assets, one should seek out an experienced tax attorney who can be instrumental in setting up the beneficiary forms correctly.
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