It’s the new year and one of your resolutions is to finally get your long-overdue estate plan in order. You’ve been hearing a lot about the time and cost associated with probate and are thinking about making a trust your beneficiary to avoid it. However, you’re not sure if it should also be the beneficiary of your 401k. Is there a reason this might not be a good idea?
Naming a trust as the beneficiary of your 401(k) can have both advantages and disadvantages. Here are some reasons why you might reconsider this option:
Complexity and Costs: Trusts can be complex to manage and may incur additional administrative costs. This complexity can make it more challenging to handle the 401(k) distributions.
Tax Implications: Trusts are subject to different, often higher, tax rules compared to individual beneficiaries, and Required Minimum Distributions (RMDs) from a 401(k) to a trust can be higher, potentially leading to a larger tax burden.
Distribution Restrictions: Trusts often have specific distribution rules that might not align with your beneficiaries’ immediate financial needs. This can limit the flexibility in how the funds are used. For example, trusts generally fall under the same rules as other non-spousal beneficiaries. According to the SECURE Act of 2019, most non-spousal beneficiaries, including trusts, must fully distribute the inherited 401(k) balances within 10 years of the account holder’s death.
There are scenarios where naming a trust as the beneficiary might be beneficial, and there are trusts that can be designed to avoid unintended negative consequences, so it’s important you meet with your financial planner and estate planning attorney to understand the specific implications for your situation and to ensure that your estate plan aligns with your goals.
Did You Know?
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Your financial planner will help you set priorities and achieve your money goals, without judgment or financial jargon. Know that all discussions are kept strictly confidential. This service is offered as an employee benefit with no per-session co-pays, so you can meet with a financial planner as often as you wish. Services are paid by your retirement plan or your employer.
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- Visit FrancisWay.com > Services > Participant Portal
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Sources:
Palmer, B. (2023, December 12). Naming a trust as beneficiary of a retirement account: Pros and cons. Investopedia. https://www.investopedia.com/naming-a-trust-as-beneficiary-of-a-retirement-account-pros-and-cons-5189947
Lento, J. M. (2023, September 15). Should I name my trust as the beneficiary of my retirement accounts? Perennial Estate Planning. https://perennialtrust.com
Fidelity Smart Money. (2024, July 16). What happens if you inherit a 401(k)? Here are the rules and your options. Fidelity. https://www.fidelity.com
