Naming beneficiary for retirement accounts
 

For accounts such as 401k, IRA, Roth, etc., we received a mixed advice from our legal and financial services as to whether our children or the Revocable Trust should be named as the secondary beneficiary (after spouse being the primary).

For those of you who have already walked this path, is there a simple answer to this?... or perhaps there are pros & cons to either one? e g., difference in tax implications?

It seems to me that your decision would depend a lot on who will be the trustee after you and your spouse pass, and how much you trust them to manage your money efficiently and to distribute it according to your instructions. Note that a trust, unlike a will, is a private document that is not subject to a court's control and oversight.

I would tend to want to name the children as beneficiaries, unless there is a very significant tax benefit to naming the trust. Also, in the case of a Roth, there are no income tax considerations.

What we were told was the difference is in the tax implications. As I understand it:

- if the trust is named then the trust has five years to withdraw the funds from the tax-deferred accounts. So divide the total amount by five and calculate the tax on that based on whatever tax rate a trust has to pay.

- if a person is named then they have ten years to withdraw the funds from the tax-deferred accounts. If multiple people are named then the total amount is allocated per the trust and then divide those numbers by ten and calculate the tax on that based on the individual's tax bracket.

A higher number divided by five and taxed at the trust rate (if different) will likely result in more taxes being paid than if that same number is split among several beneficiaries, divided by ten, and taxed at the individual's rate.

WE WERE ALSO TOLD by our financial services that they would not accept the conditions we placed on the trust for our beneficiaries (payable only after the beneficiary reaches a certain age). Therefore we were given the choice of naming the trust (higher taxes) or naming our beneficiaries with no conditions even if they were still younger than what we would like.

our kids. PERIOD

You also need to consider the cost to maintain a trust for multiple years. If a lawyer or a financial company is the trustee, they will charge management fees, investment fees, accounting fees, legal fees, tax preparation fees, etc. That is why I would want to name the children as the beneficiaries, if possible, so they can control the money and the fees.

Taxable distributions can be backwards. Children working in California or NY could be paying more than 50% tax. May be better to do Roth conversions for the tax differential.

Look into creating a 501c3 if the amounts are worthwhile. All of The wealthy use this planning device. The IRS pays no scrutiny if you execute it properly.

If the money goes to the trust then that money would need to be used to payoff your debts. If you end up with high medical bills or other debts then the amount of money that would pass to your heirs would be reduced. If you pass the IRA, Roth, life insurance etc accounts directly to your kids or whoever then that money would pass directly to them in full.

Any source for that? I can't find any rates higher than 13% and might be as low as 0%.

Definitely want to consult a tax professional before trying to play games with the IRS.

Unless you do not think the chidden can manage the money I would make them the beneficiary.
The trust would add a lot of problems and expenses. By the way I am using trusts for specific reasons but IRA goes to a beneficiary and not the trust.

I’ll send you my info … Please spell my name correctly so it doesn’t hold up my checks!!

TOTV Advice
 

Why would you come to this forum for such important advice? Talk to an estate attorney and/or accountant about your personal situation. If you want misguided opinions and misinformation you've come to the right place.

The attorney that drew up our trust had us designate a primary and secondary beneficiary for our investment accounts outside of our trust.

:BigApplause:

Both our attorney and broker said not to name the trust as beneficiary.

dews
 

Our trusted attorney advised us to add our children to our retirement accounts as the secondary beneficiary to avoid probate costs and legal fees. Also we added them to our Deeds (one in Michigan and one in Florida) under special State Deeds that allows the spouse complete control until death or otherwise decided.