Should I Put My IRA or 401(k) in My Trust? Here’s What You Need to Know
October 31, 2024
When it comes to estate planning, one common question is whether you should place your IRA, 401(k), or other retirement accounts in a trust. The short answer is no. Here’s why—and what you should do instead to protect these assets and make sure they go to the right people.
Why Your IRA Can’t Go in a Trust
“I.R.A.” stands for Individual Retirement Account, and the “Individual” part is key here. The IRS requires that IRAs, 401(k)s, and similar retirement accounts are personally owned and titled in the account holder’s name. This means you can’t transfer these accounts into a trust during your lifetime. Assets in your individual name (like your IRA) will pass according to the terms of your Will or, if you don’t have a Will, through probate. In contrast, assets in a trust pass according to the terms set out in the trust document itself.
The IRS also discourages putting IRAs into trusts due to tax concerns. Retirement accounts are tax-deferred, meaning taxes haven’t been paid on the money yet, and transferring them to a trust could disrupt this arrangement.
What You Should Do Instead: Designate Beneficiaries
Instead of putting your IRA or 401(k) into a trust, make sure you designate beneficiaries for these accounts. This is essential, as without a beneficiary, your IRA could go through probate—a lengthy and often costly court process. Probate for an IRA is avoidable with just a few forms filled out with your financial institution or advisor, designating who should inherit the account. It’s a simple yet crucial step that many overlook, leading to unnecessary costs and delays for heirs.
Tips for Choosing Beneficiaries Wisely
When selecting beneficiaries, choose individuals who are ready to inherit, such as adults who are healthy, financially responsible, and not facing any challenges like substance abuse. Avoid naming minors, as they cannot directly receive IRA distributions, which would require court intervention to manage the funds on their behalf.
If you have loved ones who are not in a position to manage an inheritance responsibly, such as minors or individuals with disabilities, you may consider naming your trust as the beneficiary instead. This doesn’t mean the trust owns the IRA; rather, the trust would inherit the funds upon your passing. In this scenario, the Trustee of your trust can serve as a “conduit” to manage and distribute the funds in a way that’s in the best interest of the beneficiary.
When the Trust Should Be a Beneficiary
Naming the trust as the beneficiary can be helpful when the designated heirs are unable to manage the funds directly. This might apply if they are minors, incapacitated, or have substance abuse issues. The Trustee can hold and manage the IRA distributions on their behalf, ensuring the funds are used responsibly and according to the terms of your trust.
Consult with Your Estate Planning Attorney
Designating beneficiaries and deciding on the best approach for your retirement accounts are crucial steps in estate planning. IRAs and 401(k)s come with specific rules and tax implications, so it’s important to make informed choices. Consulting an estate and trust attorney can help you navigate these options, especially if you have unique circumstances or complex family dynamics.
Schedule a one-hour Strategy Session with one of our trust and estate attorneys to discuss your retirement accounts, beneficiary designations, and how they align with your overall estate plan. A little planning today can provide peace of mind for you and clarity for your loved ones.