How to Handle Beneficiary Designations for Qualified Accounts? IRA, 401k, 403b

It is very important to know how you handle beneficiary designations to ensure that you get the most favorable tax possible.

Attorney and Financial Advisor Chris Berry share the strategies on how to do that in this episode of Daily Wisdom.

Estate Attorney and Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm. Register via thisĀ linkĀ or give our office a call at 844-885-4200.

Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.

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Episode Transcript


What are Qualified Accounts?

Hey, this is Chris Berry, and today we’re going to talk about how to handle beneficiary designations on IRAs and 401(k)s. This is something that has caused a lot of confusion, not just with our clients, but when we’re working with other advisors and CPAs, et cetera. And if you’d like this information, please make sure to subscribe to our YouTube channel.

Christopher Berry is a leading a state attorney and advisor in the area of retirement and legacy planning. He’s been featured in publications such as Forbes, Kiplinger’s, Crain’s Detroit and more. He’s the host of the weekly radio show and podcast, The Chris Berry Show. He’s a national fund leader, as it relates to retirement and legacy planning, and has authored the Amazon best-selling book, The Caregiver’s Legal Guide.

So qualified accounts. What are qualified accounts? Qualified accounts are accounts that have some type of tax qualification to them. 401(k)s, IRA, Roth IRAs, Roth 401(k)s, 403(b)s, et cetera. Anything that has a tax qualification. So one of the, I guess, characteristics of these accounts is that you have to be the owner of your qualified account. So we can’t name a trust as the owner of your IRA, your 401(k). it has to be in your name.

And then, especially with our pre-tax, meaning these are accounts that you haven’t paid any income tax on, and when you pull the money out, it comes out as ordinary income, like your traditional 401(k)s, traditional IRAs, not your Roths, it’s very important how we handle the beneficiary designations to ensure that we get the most favorable tax status possible. And keep in mind, this is general information. There might be certain changes in your fact pattern or circumstances that will warrant doing something different. This is just general advice.


Handling Accounts

So then the question always is, okay, we set up a trust. How do we handle those types of accounts, the IRA, the 401(k), the 403(b)? And you’re going to see differing advice out there. But trust me, we do this every day for 15 years. I’ve taught continuing education on this. I’ve taught law school classes on this. I’ve taught financial advisors, CPAs, other attorneys on this. I know what I’m talking about. And if you hear differing advice, more than happy to reach out to them and have this conversation. I’ve done this numerous times when our clients will get differing advice from somewhere else that’s managing their money. We tell them how to do it. They tell them how to do something else. We get on a conference call. Lo and behold, each and every time this has happened, the client has followed our advice because of the reasons I’m going to share with you right now, and the strategies and why right now.

So do we name the trust as a beneficiary or do you name an individual? So with a qualified account, the IRAs and 401(k)s, you have to be the owner, and then we need a name of beneficiary of that. So if you were to pass away, where’s that asset going to go? And so typically what we do, if we’re married, we name the spouse as the primary beneficiary, because they can do what’s called a spousal rollover, where now it becomes that surviving spouse’s account, and that surviving spouse, if they’re not 72 yet, they don’t have to take out any required minimum distributions. Essentially, that account becomes that surviving spouses own IRA.

And then we name the trust, if we have a trust, as the contingent beneficiary of that account. So the trust would be the contingent beneficiary. So you name spouse first, and then trust contingent.

Now you’re going to see some pushback on this, especially, if you go online, you’re going to see all kinds of different things. And you’ll see a lot of, even other advisors, not really understanding how this works. Trust me, this is how it works. I’ve taught on this. I’m well-educated on this.

The concern that these people that don’t fully understand how the tax rules work is that by naming the trust as a contingent beneficiary, they think all the taxes will have to be paid right away or within five years. But if the trust is set up correctly, which all of our trusts are, then the trust can qualify for what’s called a designated beneficiary. And what that means is they get the full 10-year stretch that’s allowed, just like if you were to name the individual outright.


Designated Beneficiary

So when you name a spouse as a primary beneficiary, they don’t have any type of stretch that they have to worry about. It becomes that surviving spouse’s IRA. They can do what they want with it. If they’re not 72 yet, they don’t even have to take out any RMDs. But when we leave it to the next generation, or leave it to anyone other than a spouse, it needs to qualify as what’s called a designated beneficiary. So that’s someone named as an individual.

So if you have three kids, you can name all three kids individually. But if you have a trust, we just have to make sure the trust is set up properly to still qualify as a designated beneficiary. And by naming the trust as a beneficiary, now you’re building in extra protections for those beneficiaries where, if the trust is set up right, we can give them a lifetime of asset protection. So if they inherit that IRA, anything they keep inside of that IRA, even if they have to pay the taxes within 10 years, anything they keep inside of that trust could be protected from divorces, creditors, bankruptcies.

+That’s not possible if we name them outright as a beneficiary. And we can still stretch it the full 10 years, just like if we were to name them outright as a beneficiary, plus if they were to pass away, we can make sure that that IRA doesn’t go to the surviving spouse, the in-law who we call an outlaw. Instead, it could flow down to either your grandchildren or go to your other children. So there’s no downside if it’s set up correctly to name the trust as the contingent beneficiary of any type of qualified accounts, like IRAs 401(k)s.


Funding Qualified Accounts

So in our office, almost always, you’re the owner of your qualified account, like your 401(k) or IRA. And then we name the spouse as a primary beneficiary, and then we’ll name the trust as the contingent beneficiary. And then the trust will split it up amongst the beneficiaries, and each beneficiary then will get all of the benefits of the trust and all of the stretch of the IRA that’s allowable under the SECURE Act, that limited the stretch, whether you name it individual or trust, up to 10 years.

So again, how do we handle funding qualified accounts into trusts, or how do we handle beneficiary designations of qualified accounts? Typically, we’re going to have the owner of the qualified account, will be the owner, of course. The primary beneficiary, so if the owner passes away, it goes to the spouse as a primary beneficiary. And then the contingent beneficiary would be the trust. And the trust would then direct where it goes if that spouse passes away. So you’re getting all the benefits of the best tax planning possible, plus all the benefits that the asset protection trust or all the benefits that the trust can provide in terms of making sure the money stays where it’s supposed to go, protecting it for the family, making sure the kids inherit it, they’re protected from divorces, creditors, bankruptcies, et cetera.

And if you disagree with me, put it in the comments. I’d love to have a discussion on this because there is a lot of other information out there, but every single time I’ve had a conversation on this, every conference call I’ve had, this is the way it ends up going, is we name the spouse as a primary beneficiary, the trust as a contention.

This has been Chris Berry, Castle Wealth. Thank you so much.

Castle Wealth Group has clients across the nation, and helps families plan, protect and preserve what is important, by creating a retirement and legacy blueprint.



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