Your Retirement Accounts Don’t Go “IN” Your Living Trust!

I can’t tell you how many times clients tell me, “Yeah, I put my IRA in my living trust.” You see, an IRA is an Individual Retirement Account. It is owned by an “individual” – not a living trust. It’s the same thing with 401 (k) accounts and 403(b)accounts and most other retirement accounts. They don’t go “in” your trust.

The reason is that retirement accounts are distributed to a “designated beneficiary.” When you set up a retirement account, they will generally ask you to designate a beneficiary on a “beneficiary form” – someone who will get that retirement account when you pass away. Then you should designate a secondary/contingent beneficiary. You designate a beneficiary (both primary and secondary) by filling out forms that your company gives you when you open the account.

If you name your nephew “David” as your beneficiary, then your nephew “David” gets your IRA when you die. What you say in your living trust is irrelevant. The beneficiary form “trumps” your will or your trust. Imagine your IRAs are on an entirely different planet. The only thing that governs the distributions of a retirement account is the beneficiary form.

Now, that being said, some people may choose to make their living trust the BENEFICIARY of their retirement account. Now that’s what they might be thinking when they say their IRA is “in” their living trust. So while the IRA might be payable to a living trust as a beneficiary, the IRA is not “in” the trust as real estate, bank accounts, investments, and other assets actually titled in the name of the trust would be.

It is not a good idea to name your living trust as the beneficiary of a retirement account for several reasons:

1. Naming a trust as the beneficiary of your retirement account may be entirely unnecessary. It puts an administrative burden on your trustee to make sure the required minimum distributions are withdrawn every year and distributed to the beneficiaries.
2. There may be negative tax consequences if you name a living trust as the beneficiary of a retirement account.
3. It’s logistically much simpler to name human beings as beneficiaries of a retirement account. Naming the trust as the beneficiary can be an administrative nightmare and cause unnecessary complications.

So, here’s my basic advice when it comes to retirement accounts:

1. Name your spouse as your primary beneficiary (it’s usually required anyway). If you’re unmarried, name anyone you want.
2. Then name your children (or anyone else you want) as secondary/contingent beneficiaries.

Now this assumes your beneficiaries are in good shape and you don’t have any major concerns about how they would handle an inherited retirement account.

However, if you do have significant concerns, then you may indeed wish to name your living trust as the beneficiary. You can also change your mind over the years, for example, when my children were young, I named my living trust as the secondary beneficiary on my retirement accounts. However, now that my children are older, I have named them as the contingent beneficiary after my wife.

Call the “Trust Doctor,” W. Bailey Smith at (949) 833-8891; email him at BSmith@YourTrustDr.com