Retirement accounts like IRAs and 401(k)s are often among the largest assets in an estate. But when it comes to estate planning, they operate under a very different set of rules compared to other types of property. Many Florida residents want to know whether it makes sense to name a trust as the beneficiary of a retirement account — and if so, how to do it correctly. Here's what you need to know.
Can a Retirement Account Be Held in a Trust?
During your lifetime, retirement accounts cannot be retitled into a trust. They must remain in your individual name to maintain their tax-deferred status. However, you can name a trust as the beneficiary of a retirement account, which allows the trust to receive the proceeds after your death and manage how those funds are distributed to your heirs.
Why Use a Trust for a Retirement Account?
Naming a trust as the beneficiary may be a good strategy when:
1. You Want Control Over How Funds Are Distributed
A trust allows you to set rules, such as:
- Delaying distributions until a beneficiary reaches a certain age
- Requiring that funds be used for education or medical needs
- Preventing an irresponsible heir from receiving a lump sum
2. Your Beneficiary Is a Minor, Has Special Needs, or Faces Creditor Issues
Trusts can be designed to provide lifelong protection for vulnerable beneficiaries. For example, a special needs trust may be appropriate for a disabled child, and a spendthrift clause can protect the account from creditors or divorce.
3. You Want to Preserve Some Tax Deferral
Although the rules have changed (see below), trusts can still help beneficiaries avoid immediate taxation, depending on how the trust is structured.
Understanding the 10-Year Rule (Post-SECURE Act)
Since the SECURE Act of 2019, most non-spouse beneficiaries of retirement accounts must withdraw the entire balance within 10 years of the account owner's death. This includes most trusts as beneficiaries.
However, exceptions apply for “eligible designated beneficiaries”, including:
- Surviving spouses
- Minor children (while they are minors)
- Disabled or chronically ill individuals
- Individuals less than 10 years younger than the decedent
For these beneficiaries, distributions may still be stretched over their life expectancy if the trust is set up properly.
Types of Trusts Commonly Used
Conduit Trust
- Acts as a pass-through: the required minimum distributions (RMDs) from the IRA are immediately passed to the beneficiary.
- Offers some protection while still qualifying for favorable tax treatment.
- Cannot retain IRA funds in the trust.
Accumulation Trust
- Can hold onto distributions, offering more control and protection.
- May result in higher taxes if income is retained by the trust.
- Needs to be carefully drafted to remain a “see-through trust” under IRS rules.
Risks of Naming a Trust as Beneficiary
- Tax Rates: Trusts reach the top federal income tax bracket much faster than individuals.
- Complexity: Trusts must meet specific IRS criteria to qualify as a “see-through” trust.
- Legal Drafting Requirements: A poorly drafted trust can trigger immediate taxation or unintended distributions.
Best Practices for Florida Residents
- Get Professional AdviceRetirement accounts are subject to special tax rules that change frequently. A trust must be drafted to comply with both federal tax law and Florida trust law.
- Use Precise Beneficiary DesignationsIt’s not enough to name “my trust” — the full legal name and date of the trust should be listed.
- Coordinate with Your Entire Estate PlanTrusts can be powerful tools, but they must be coordinated with your will, power of attorney, health care directives, and financial institutions.
Conclusion
Trusts can be an effective way to manage and protect retirement account distributions for your loved ones — but they must be used carefully. The decision to name a trust as a beneficiary should never be made without legal guidance. At Bart Scovill, PLC, we help Florida families design estate plans that are clear, protective, and tax-efficient.
If you’re unsure whether a trust should be the beneficiary of your retirement account, contact us today to schedule a consultation.
Disclaimer: This article is for general informational purposes only and does not constitute legal, financial, or tax advice. Reading this content does not create an attorney-client relationship with Bart Scovill, PLC. You should consult with a qualified professional regarding your specific situation before making any decisions related to estate planning or retirement accounts. https://scovills.com/?p=3410
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