Unless you are creating a specific trust designed to hold a retirement account, it is not advisable to transfer retirement accounts to a trust. By transferring a retirement account into a trust, you will likely trigger withdrawal penalties and taxes. Even though it is still your money, 401(k) plans and IRA accounts see the transfer as a withdrawal, as does the Internal Revenue Service (IRS). There are still tools to avoid having these accounts go through probate.
Retirement Accounts and Beneficiary Designation
To avoid probate of retirement accounts you can either: create a Revocable Trust and name the trust as the beneficiary, or name individuals as the beneficiary. When a beneficiary is on a retirement account, the account is paid directly to that person (or Trustee if a Trust is named). A beneficiary designation is a private contract between the company and the beneficiary (after you pass). By naming a Trust as beneficiary, you can control the terms of how the funds from a retirement account are distributed.
Since retirement accounts tend to be our largest assets, it is not always a good idea to have all of the funds distributed outright to someone immediately. For minor beneficiaries, a trust allows someone to manage and use the funds on the minor’s behalf without a conservatorship. For Medicaid planning purposes, naming a spouse may accidentally prevent them from qualifying. A trust allows you to direct the assets to the people you want, under the terms you desire.
New Laws for Distribution
In 2020, the federal government passed the SECURE Act. Previously, an IRA or 401(k) left to a beneficiary (trust or individual) could stretch payments from that account over the beneficiary’s expected lifetime. Now, the accounts must be fully paid out within 5 or 10 years depending on the beneficiary.
There are exceptions to the new rules. If you name your spouse as a beneficiary, it is the same as if your spouse was the original owner of the account. The IRS gives special consideration to spouses as beneficiaries of retirement accounts. As long as your spouse is the only beneficiary, they become the sole owner and can deposit money into their account or rollover the funds over into his or her account. While your spouse will not incur taxes on the money from the IRS, he or she is still responsible for withdrawal fees.
A person who is disabled or chronically ill will also be allowed to have distributions stretched over their lifetime. If a minor is a beneficiary, the 10-year clock will not begin until the minor attains the age of 18. Lastly, a beneficiary who is not more than 10 years younger than the deceased will be exempt from the 10-year payout period.
There are many considerations when drafting a trust to take advantage of the longest distribution period allowable and accounting for tax consequences, asset protection, and wealth preservation. An attorney can provide guidance on beneficiary designations for your retirement accounts and work with you to craft an estate plan to achieve your goals.
To learn more about retirement accounts and estate planning solutions contact our Georgia estate planning attorneys at Grissom Law, LLC for a consultation.
Disclaimer
This Blog/Web Site is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide legal advice. By using this blog site you understand that there is no attorney-client relationship between you and Grissom Law, LLC.