Too often we have clients who have “rubber-stamped” the designation of a spouse or children as the beneficiary of the client’s IRA, 401k or other account-holding “qualified retirement funds”. Often times this “legal advice” has come through the suggestion of a financial planner, banker or even a well-intended friend or relative. Many times, the client’s goal is to keep things “simple” and to defer the income tax liability of the retirement funds. This so-called “simple” plan can result in complex problems, or in a situation where we find the “tax-tail” wagging the dog.
Non-tax family issues and circumstances are often far more important to our clients than deferral of tax liability. Examples are second marriages, minor children, beneficiaries who are unable to manage their assets due to a disability, etc. Many times, the client can have his/her cake and eat it too, by using a properly drafted trust that can hold and manage the retirement accounts for the beneficiaries and still provide a deferral of tax liability. This is accomplished through naming the trustee of the trust as the beneficiary on the retirement account. Under the terms of the trust, the trustee would distribute any Requirement Minimum Distribution (RMD) to the beneficiaries, but the trustee would continue to hold and manage the account/s. This arrangement restricts the individual beneficiary’s ability to withdraw sums in excess of the RMD. It can also protect government benefit eligibility for persons with disabilities, and provide for asset management for a minor without the need of a court-appointed guardian.
Specific language for managing retirement accounts should be included in your trust document. A qualified attorney should draft the trust for you and assist you with properly completing any Beneficiary Designation forms.
Be sure you know the pros and cons of naming an individual as a direct beneficiary of your retirement funds. Simple may not be better.