Should a Trust Be Named as a Beneficiary of a Qualified Account? | Trust as Contingent Beneficiary

Should a Trust be named as a beneficiary of a qualified account? Learn about Trust and more in this episode of Daily Wisdom.

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Episode Transcript

Qualified Accounts

Qualified accounts are things like 401(k)s, IRAs, 43Bs, really anything pre-tax. And in fact, this is a question I get from not just family member or clients, potential clients and clients, but also from other financial professionals. And this is one thing that really frustrates me. Is the confusion on this topic. And in fact, just before I hopped on this webinar, I saw that I have a phone call scheduled with another client’s advisor to educate that advisor on how this works.


Designated Beneficiary

The answer is, unfortunately, it depends. It depends on what type of trust that you’re creating. Any trust that we create in our office is going to qualify as what’s called a designated beneficiary. This is the key. Is that the trust has to qualify as a designated beneficiary, because if it doesn’t qualify as a designated beneficiary, then all the taxes would have to be paid within five years. So if you’re leaving like $1 million IRA to the next generation and the trust does not qualify as a designated beneficiary, then all the taxes would have to be paid within five years.


Setting Up the Trust in the Proper Manner

Now, prior to the SECURE Act, if we set up the trust in the proper manner, all of the taxes could be paid stretch out over the lifetime. But now because we have the SECURE Act, whether we name a individual like a son or daughter as a beneficiary or a trust, at most we have a 10-year stretch out. So either way, whether we name an individual or a trust, thanks to the SECURE Act, the SECURE Act means that we can only stretch out those pre-tax accounts 10 years, meaning stretch out paying the taxes over 10 years. And that’s regardless of whether we name a trust, one of our trusts that qualify as a designated beneficiary or an individual.

Now, typically we name the spouse as the primary beneficiary so they can do what’s called a spousal rollover, where now that surviving spouse inherits that IRA and it becomes their IRA, where they don’t have to take out any required minimum distributions or anything like that. But typically we’ll name spouse as the primary beneficiary, and then the trust as the contingent beneficiary. One of the big reasons why we do that is a lot of times in our trust when we do, we build on what we call legacy inheritance provisions. Meaning that if your children were to inherit an IRA, 401(k), 43B, post-tax accounts, ROTH, life insurance, if they’re to inherit, and it’s one of our legacy inheritance trusts, then whatever they inherit from you would be protected from a divorce, a lawsuit, creditor action, bankruptcy. Very different than leaving it outright to a beneficiary. Plus if that individual were to pass away, then the money stays in the bloodline versus going to a spouse who might remarry.


Maintaining Tax Benefits

So for that reason, two reasons. One is we name a trust as a beneficiary because they will have the same tax implications if we named the individual. And then second, typically when we’re setting up a trust, we build on language, so whatever the beneficiaries or kids inherit would be protected from divorces, lawsuits, creditors, bankruptcies. And this is something that just for the last 10 years has infuriated me, is that a lot of people who hold themselves out as financial advisors or financial professionals are giving wrong, bad, or just uneducated advice with regards to trusts. And so again, I think the trust should be named typically as a contingent beneficiary if you’re married, because we can maintain all of the tax benefits in naming the individual outright, but now we can build an opportunity for a lifetime of asset protection.

So if someone’s telling you not to name the trust as a beneficiary of a qualified accounts, I would be happy to have a conversation with them and educate them on why the trust typically should be named as a contingent beneficiary. Again, we want to name the spouse as the primary beneficiary nine times out of 10, but then we’ll name the trust as the contingent beneficiary for the asset protection provisions that we talked about, plus from a tax perspective. It’s no different with our trusts than naming an individual outright. So there’s no downside to naming the trust. Only an upside of naming the trust as a beneficiary of that qualified account.


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