While both retirement accounts and revocable living trusts can both avoid the cost and time of probate court, putting retirement accounts in living trusts is not only possible, but, if done correctly, effective. Correctly is the operable word, as the living trust should be the beneficiary of IRAs and other retirement accounts to avoid nasty tax and probate court surprises. Beneficiaries can stretch out IRA distributions over their life expectancy, if you set up the trust properly.
Although a living trust does not offer asset protection while the trustor is alive, after the trustor's demise the beneficiaries can stretch IRA payouts and distribute trust assets to beneficiaries with beneficial tax treatment and asset protection. A beneficiary trust will protect retirement account balances from creditors, divorce decree requirements and your long-term care expenses for beneficiaries.
IRAs and 401(k) Accounts
While you face legal problems assigning your IRA or 401(k) accounts to a trust, since you own them individually in your own name, you can name a trust as the beneficiary. The beneficiary trust participants and beneficiaries can receive your retirement fund balances in IRAs and 401(k)s without probate problems, assuming the trust is designed properly.
Primary or Contingent Beneficiary
Consider using a living trust as the primary or contingent beneficiary of retirement accounts. At least consider naming a trust as a contingent beneficiary if you name your spouse or another person as the primary beneficiary, as the primary beneficiary may predecease you. Naming a trust as your primary or contingent beneficiary will protect your trust participants from probate and estate tax issues.
According to well-known financial educator, author and talk-show host, Jim Brogan, having a trust as beneficiary for your IRA or 401(k) is a "delicate process." For example, if you have another trust set up to protect other assets, do not include your retirement accounts in this trust, as taxable mistakes often occur when trust assets are distributed. Additionally, having your retirement account balances simply payable to a trust triggers all income taxes due to be paid immediately. To protect your tax benefits and your heirs, re-title your retirement accounts as "inherited" IRAs or 401(k)s FBO (for benefit of) your beneficiary trust.
You should put your retirement accounts in a living trust only for personally specific reasons. Since there are no additional tax benefits, only potential tax problems, from using a living trust for retirement accounts, consider your reasons carefully. For example, if you're concerned that your spouse or children will suffer tax consequences or spend your retirement funds immediately, you should consult an experienced financial planner to eliminate the dangerous potential consequences. This will protect your retirement accounts from undue taxation and distribute your retirement account balances per your wishes.
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