While most assets can be transferred into trust, certain assets are contractual in nature, and therefore cannot be “funded” into your trust.  The most relevant of these contractual assets are life insurance policies and retirement benefits.

While you cannot place these assets in trust*, you can name your revocable living trust (RLT) as the Designated Beneficiary.  When you die, the holder will pay the funds to the Designated Beneficiary.

Should you name your trust as the Designated Beneficiary?  There are two different forms of trust available to be your Designated Beneficiary: accumulation trusts and conduit trusts.

Accumulation trusts are trusts which collect the minimum required distributions (RMD), and distribute them only pursuant to the trust’s provisions.  This provides both creditor protection over the funds, and continued financial management for what otherwise might be spendthrift beneficiaries.  However, in order to qualify as a Designated Beneficiary, the accumulation trust must meet several, stringent requirements.  For instance, only individuals may be beneficiaries of the accumulation trust, including remainder beneficiaries – this precludes any charitable giving within the trust.  Further, to avoid an argument that the taxpayer's estate is a beneficiary of the trust (because an estate cannot be a Designated Beneficiary) the trust must provide that any debts, taxes, or expenses payable from the trust cannot be paid after September 30 of the year after the calendar year of the taxpayer's death.  Additionally, the trust agreement must prohibit trust distributions to anyone who is older than the person whose life expectancy is used to calculate the RMD (determined by the oldest beneficiary named in the trust (including remainder beneficiaries)), to an estate, or to a charity.  This entails only allowing very specific and limited powers of appointment for the beneficiaries, which can severely hamper the trustmaker’s intentions.  Moreover, this area of law is not well settled, and many experts recommend not doing an accumulation trust absent a Private Letter Ruling from the IRS, blessing your particular trust.

All in all, accumulation trusts at this point in time and law are often neither useful, nor feasible.

Conduit trusts are designed to be seen-through, such that the benefits flow directly through the trust to the beneficiaries when making distributions from the retirement asset.  This provides neither creditor protection, nor post-mortem management on behalf of your beneficiaries. The RMD is calculated by looking at the oldest beneficiary.  This means, if you have several young beneficiaries (like your children), and one older (spouse), the spouse’s age will be used to determine RMDs, and no real stretch-out will be available to you.   That said, there are situations where naming the conduit trust as primary, or perhaps alternate, beneficiary is appropriate, and which should be discussed with an estate planning attorney.

If you are married, most of the time it is going to be appropriate to name your spouse as your primary beneficiary.  A spouse can usually roll an IRA into his or her own IRA, and therefore delay the RMDs until he or she turns 70 ½ (the flip side of this is that s/he also gets the 10% penalty if they withdraw before 59 ½).  Additionally, upon rollover, a spouse can use the uniform life table, which is based on the joint life expectancy of the spouse and a hypothetical 10-years-younger beneficiary – meaning the RMDs can be stretched out.   One item to consider, however, is that upon rollover, the spouse can name his or her own designated beneficiaries, meaning any remaining benefits not used by the spouse will go to whomever s/he names; so if you have kids from separate marriages, this may not be an ideal result.

Ultimately, who or what to name as the designated beneficiary is going to be determined on a case by case basis, and should be done in the context of your overall estate plan.

* Some trusts, called Irrevocable Life Insurance Trusts (ILITs), are created specifically to own life insurance policies.  This article focuses only on retirement benefits and trusts.

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