Naming the right beneficiary for tax-deferred retirement
accounts is critical. Most people want to continue the tax-deferred growth for
as long as possible, pay the least amount in income taxes and get the maximum
stretch-out. Required distributions after the owner dies will be based on the
new beneficiary’s age and life expectancy, so the younger the beneficiary (like
a child or grandchild), the longer the stretch out.
naming a beneficiary outright has several disadvantages. If the beneficiary is
a minor, distributions will need to be paid to a guardian; if no guardian
exists, one will have to be appointed by the court. An older beneficiary may be tempted to take larger distributions or
even cash out the entire account, destroying your plans for continued
tax-deferred growth. The money could be available to the beneficiary’s
creditors, spouse and ex-spouse(s). There is the risk of court interference if
your beneficiary becomes incapacitated, and the extra income could cause a
beneficiary with special needs to lose government benefits. If your beneficiary
is your spouse, he/she will be able to name a new beneficiary and is under no
obligation to follow your wishes.
Naming a trust as beneficiary provides more control over, and
protection for, these tax-deferred accounts. Ideally it is a separate trust
designed specifically for this purpose; because it must meet certain
requirements from the IRS, it’s best if it’s not part of a revocable living
trust or other trust. For this reason, these trusts are often called
“stand-alone retirement trusts.”
Required minimum distributions will be paid into the trust for the benefit of your beneficiary. The trust can
either be mandated to then pay these distributions directly to the beneficiary
(called a conduit trust) or it can accumulate these distributions (called an
accumulation trust) and pay out trust assets according to your instructions
(for example, for higher education expenses, down payment on a home, etc.)
Because a trust is the named beneficiary instead of the
individual, no guardian is needed for minor children and there is no risk of
court interference at the beneficiary’s incapacity. An accumulation trust will
allow the trustee to receive the required distributions and use discretion to
provide for a special needs beneficiary without jeopardizing government
benefits.
larger distributions, assuring the continuation of tax-deferred growth. If a
conduit trust is used, distributions that are paid to the beneficiary (but not
the account itself) would be subject to creditor claims. Thus, for maximum
creditor protection, an accumulation trust is preferable.
document, allowing you to keep control over who will receive the proceeds if
your initial beneficiary should die before the account is fully paid out.
please contact my estate planning office, located near Redwood City, Menlo Park, and Palo Alto.
