Can Retirement Accounts Be Put in a Trust?

Retirement accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s, help individuals save for their future. A trust is a legal arrangement where a trustee holds and manages assets for beneficiaries. It is possible to name a trust as the beneficiary of a retirement account, but this decision involves intricate rules and various implications.

Strategic Considerations for Retirement Assets

Naming a trust as a beneficiary for retirement accounts can achieve specific estate planning objectives. This approach provides control over how and when assets are distributed after the account owner’s passing, which is not always possible with direct beneficiary designations. For instance, a trust can ensure that funds are managed responsibly for beneficiaries who may be minors, have special needs, or are considered spendthrifts, preventing them from prematurely depleting their inheritance.

A trust can also protect assets from creditors or potential lawsuits against beneficiaries. It allows the account owner to set specific conditions for distributions, such as requiring beneficiaries to reach a certain age or meet educational milestones. This level of oversight helps preserve the legacy for future generations and ensures assets remain within the family, aligning with the original intent of the account holder.

Key Trust Structures

Trusts are generally categorized as either revocable or irrevocable. A revocable trust, also known as a living trust, can be modified, amended, or canceled by the grantor during their lifetime, offering flexibility and control over the assets. Assets held in a revocable trust typically avoid the probate process.

Conversely, an irrevocable trust generally cannot be changed, modified, or terminated without the consent of the grantor and all beneficiaries once it is established. While assets transferred into an irrevocable trust are typically removed from the grantor’s taxable estate and receive protection from creditors, this comes at the cost of relinquishing control.

For retirement assets, two primary types of trusts, known as “see-through” trusts, are commonly used: conduit trusts and accumulation trusts. A conduit trust mandates that any distributions received from the retirement account must be immediately passed through to the trust beneficiaries. This structure ensures that distributions are taxed at the beneficiary’s individual income tax rate, which is often lower than the trust’s tax rate. While conduit trusts offer simplicity, they provide limited asset protection once the funds are distributed to the beneficiary.

In contrast, an accumulation trust provides the trustee with the discretion to either distribute funds to the beneficiaries or retain them within the trust. This flexibility allows for greater asset protection by keeping funds within the trust, shielding them from beneficiaries’ creditors or poor financial decisions. However, any income retained within an accumulation trust is taxed at the trust’s income tax rates, which can reach the highest marginal rates more quickly than individual rates. Both conduit and accumulation trusts must meet specific IRS requirements to qualify as “see-through” trusts, which allows the beneficiaries of the trust to be treated as if they were the direct beneficiaries of the retirement account for distribution purposes.

Tax Implications for Trust-Owned Accounts

Naming a trust as a retirement account beneficiary introduces specific tax rules and considerations, particularly concerning Required Minimum Distributions (RMDs). The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 altered RMD rules for inherited retirement accounts, generally requiring most non-spouse beneficiaries to fully distribute inherited funds within a 10-year period following the original account owner’s death. This 10-year rule applies to most non-eligible designated beneficiaries, including many trusts, accelerating the taxation of inherited retirement assets.

For a trust to qualify for beneficiary treatment and potentially utilize the 10-year payout period, it must meet “see-through” trust requirements:
Be a valid trust under state law.
Be irrevocable or becoming irrevocable upon the account holder’s death.
Have identifiable beneficiaries.
Provide a copy of the trust document to the plan administrator by October 31 of the year following the account holder’s death.

If a trust does not meet these criteria, the retirement account may be subject to a more restrictive five-year distribution rule.

Income tax is levied on distributions from the retirement account. If a trust retains the distributions (as in an accumulation trust), the trust itself pays income tax on that retained income. Trust tax rates are compressed, meaning they reach the highest marginal tax rates at much lower income thresholds compared to individual tax rates. Conversely, if the trust distributes the income to the beneficiaries (as in a conduit trust), the beneficiaries pay the income tax at their individual rates. Recent IRS final RMD regulations, released in July 2024, confirm the “see-through” trust concept and allow for separate accounting for multiple beneficiaries within a trust, potentially allowing each beneficiary to use their own RMD schedule if the trust document specifies immediate division into sub-trusts.

Process for Naming a Trust as Beneficiary

Naming a trust as a retirement account beneficiary requires careful preparation. Before initiating the process, gather all essential information about the trust. This includes the trust’s complete legal name, the date it was established, and the names of all acting trustees. The trust document itself is important as the financial institution may review it to ensure the trust meets all necessary requirements for beneficiary designation.

Once this preparatory information is compiled, obtain the beneficiary designation forms directly from the retirement account custodian. These forms typically require specific details about the designated beneficiary. Accurately complete the fields related to the trust, ensuring the trust’s legal name and establishment date are precisely entered. If the form asks for the trustee’s information, provide their full legal name, mailing address, date of birth, and Social Security number. For 401(k) accounts, spousal consent may be required if you are married and naming a beneficiary other than your spouse.

After all necessary information has been gathered and the beneficiary designation forms are fully completed, submit them to the retirement account custodian. Submission methods can vary, often including online portals, mailing instructions, or in-person delivery to a branch office. Following submission, expect to receive a confirmation receipt from the financial institution. Occasionally, the institution may follow up with requests for additional documentation, such as a copy of the trust agreement, to verify the designation.