Can You Put Retirement Accounts in a Trust?

Retirement accounts are fundamental components of many financial plans, accumulating tax-deferred growth over decades. Trusts serve as versatile estate planning tools designed to manage and distribute assets. A common inquiry concerns the interaction between retirement accounts and trusts. Retirement accounts are not typically transferred into a trust during the account owner’s lifetime; instead, due to specific Internal Revenue Service (IRS) regulations, they must remain titled in the individual’s name. However, a trust can be designated as the beneficiary of a retirement account, enabling its terms to govern the distribution of funds upon the account owner’s death. This approach introduces complexities and specific rules that account holders must navigate.

Designating a Trust as Retirement Account Beneficiary

Naming a trust as the beneficiary of a retirement account offers distinct advantages over naming individual beneficiaries directly. This strategy provides greater control over how and when assets are distributed, which is particularly beneficial in various estate planning scenarios. For example, a trust can ensure that distributions to minor children, beneficiaries with special needs, or individuals who may not manage a large inheritance responsibly are controlled by a trustee.

A trust can also protect inherited assets from a beneficiary’s creditors or from being divided in a divorce settlement. While personal retirement accounts often have some creditor protection during the owner’s lifetime, this protection may not extend to inherited retirement accounts for individual beneficiaries. By directing assets to a trust, the account owner can establish a layer of protection that helps preserve the inheritance.

Designating a trust as a beneficiary allows for the specification of contingent beneficiaries, ensuring assets pass to successive individuals if primary beneficiaries predecease the account owner. This provides a clear succession plan that might not be possible with standard beneficiary designation forms. Utilizing a trust for retirement assets can also help avoid the probate process for those specific funds, potentially saving time and reducing administrative costs for heirs.

Types of Trusts Used for Retirement Assets

When a trust is named as a retirement account beneficiary, the type of trust chosen significantly impacts how the assets are managed and taxed. A revocable living trust is a common choice, offering flexibility during the grantor’s lifetime as it can be modified or revoked. Upon the grantor’s death, a revocable living trust typically becomes irrevocable, and its terms then dictate the distribution of the retirement account assets.

In contrast, an irrevocable trust is established immediately and generally cannot be altered or terminated by the grantor. This type of trust provides immediate asset protection and can be useful for certain estate tax planning objectives. However, its lack of flexibility means careful consideration is needed before designating it as a beneficiary.

Two primary types of trusts are commonly distinguished for inherited retirement accounts: conduit trusts and accumulation trusts. A conduit trust is structured to pass all Required Minimum Distributions (RMDs) received from the retirement account directly to the trust’s individual beneficiaries. The trust acts as a “conduit,” meaning the distributions do not accumulate within the trust, and the beneficiaries are taxed on the income at their individual tax rates.

Conversely, an accumulation trust, also known as a discretionary trust, allows the trustee to retain and accumulate RMDs or other distributions within the trust rather than immediately distributing them to the beneficiaries. This provides the trustee with discretion over distributions, which can be valuable for asset protection or for beneficiaries who are not equipped to manage large sums. However, income retained within an accumulation trust is subject to the trust’s own tax rates, which are typically much higher and more compressed than individual income tax rates.

For a trust to qualify for certain beneficiary treatment under RMD rules, it must meet specific IRS requirements. These include being a valid trust under state law, becoming irrevocable upon the account owner’s death, and having identifiable individual beneficiaries. Meeting these criteria allows the individual beneficiaries of the trust to be treated as designated beneficiaries for RMD purposes, which can impact the distribution period.

Taxation Rules for Trust Beneficiaries

The taxation of retirement accounts inherited by a trust involves specific rules, particularly concerning Required Minimum Distributions (RMDs). Under the SECURE Act, enacted in 2019, most non-spouse individual beneficiaries of retirement accounts are generally subject to the 10-year rule. This rule requires the inherited account to be fully distributed by the end of the tenth year following the original account owner’s death. This 10-year rule also applies when a trust is named as beneficiary, unless the trust’s underlying beneficiaries qualify as “eligible designated beneficiaries” (EDBs).

Eligible designated beneficiaries include the surviving spouse, a minor child of the account owner (until they reach the age of majority, after which the 10-year rule applies), a disabled individual, or a chronically ill individual. These EDBs can stretch RMDs over their life expectancy, even if the account is inherited through a trust, provided the trust is properly structured as a “see-through” trust. If a trust has multiple beneficiaries, and some are EDBs while others are not, the RMD calculation can become more complex.

Distributions from a retirement account, whether to an individual or a trust, are generally taxed as ordinary income in the year they are received. When a trust receives distributions, the income tax liability depends on whether the income is distributed to the trust’s beneficiaries or accumulated within the trust. If distributions are passed through to beneficiaries, they report the income on their individual tax returns at their personal income tax rates.

If the trust retains the income, it is taxed at the trust’s own tax rates. Trust income tax brackets are significantly more compressed than individual income tax brackets. For example, in 2025, a trust’s income exceeding approximately $15,650 can be taxed at the highest federal income tax rate of 37%. This can result in a substantially higher tax burden compared to distributions made directly to individual beneficiaries.

A trust can claim an income distribution deduction for amounts distributed to beneficiaries, effectively shifting the tax burden to the beneficiaries. This is a key difference between conduit trusts and accumulation trusts. A conduit trust distributes all RMDs to beneficiaries, allowing the income to be taxed at the beneficiaries’ potentially lower individual rates. An accumulation trust, which can retain income, may face higher tax rates on the undistributed portion.

Practical Steps for Trust Designation and Administration

The process of designating a trust as a retirement account beneficiary requires precision to ensure compliance with IRS rules and the account owner’s wishes. The first step involves completing the beneficiary designation form provided by the retirement account custodian. This form requires the full legal name of the trust, the date it was established, and the name of the trustee. It is crucial to ensure the trust is correctly identified on this form to prevent potential complications.

After the account owner’s death, the trustee of the designated trust assumes responsibilities. The trustee must notify the retirement account custodian of the death and provide necessary trust documents, such as a copy of the trust instrument or a certification of trust. Providing clear and complete information to the custodian is important for smooth administration.

A primary duty of the trustee involves understanding and calculating the Required Minimum Distributions (RMDs) from the inherited retirement account. This calculation depends on the type of trust (conduit or accumulation), the status of the trust’s beneficiaries (e.g., eligible designated beneficiaries), and the age of the deceased account owner at the time of death. The trustee is responsible for making timely distributions to the trust beneficiaries according to the trust’s terms and the applicable RMD rules.

The trustee is also responsible for the trust’s tax reporting obligations, which includes filing Form 1041, U.S. Income Tax Return for Estates and Trusts. This form reports the trust’s income, deductions, and distributions to beneficiaries. Maintaining accurate and detailed records of all transactions, distributions, and tax filings is essential for proper administration and to demonstrate compliance with both the trust’s provisions and tax regulations. Due to the intricate nature of these rules and responsibilities, seeking guidance from an experienced estate planning attorney, financial advisor, and tax professional is highly recommended to ensure proper implementation and ongoing management.