I can't tell you how many times clients tell me, "Yeah, I put my IRA in my living trust." You see, an IRA is an Individual Retirement Account. It is owned by an "individual" - not a living trust. It's the same thing with 401k accounts and 403b accounts and most other retirement accounts. They don't go "in" your trust.
In fact, in many cases, these types of accounts won't have anything to do with your living trust. The reason is that retirement accounts are distributed to a designated beneficiary. When you set up a retirement account, they will generally ask you to designate a beneficiary on a "beneficiary form" - someone who will get that retirement account when you pass away. Then you should designate a secondary/contingent beneficiary. You designate a beneficiary (both primary and secondary) by filling out forms these companies give you when you open the account.
Therefore, if you name your cousin "Sally" as your beneficiary, then your cousin "Sally" gets your IRA when you die. What you say in your living trust is irrelevant. The beneficiary form trumps your will or your trust. Imagine your IRAs are on an entirely different planet. The only thing that governs the distributions of a retirement account is the beneficiary form. So you see, these retirement accounts don't go "IN" your living trust. In fact, they generally have little, if anything, to do with your living trust.
Now, that being said, some people may choose to make their living trust the BENEFICIARY of their retirement account. Now that's what they might be thinking when they say their IRA is "in" their living trust. So while the IRA might be payable to a living trust as a beneficiary, the IRA is not "in" the trust as real estate, bank accounts, investments, and other assets actually titled in the name of the trust would be. Some practitioners are fond of advising their clients to name their living trust as the beneficiary of a retirement account . I'm not terribly fond of this approach for several reasons:
1) Naming a trust as the beneficiary of your retirement account may be entirely unnecessary. It puts an administrative burden on your trustee to make sure the required minimum distributions are withdrawn every year and distributed to the beneficiaries.
2) There may be negative tax consequences if you name a living trust as the beneficiary of a retirement account.
3) It's logistically much simpler to name human beings as beneficiaries of a retirement account. Naming the trust as the beneficiary can be an administrative nightmare and cause unnecessary complications.
I tell my clients that if they name their living trust as the beneficiary of a retirement account, they have to ask themselves WHY they are doing so.
So here's my basic advice when it comes to retirement accounts: Name your spouse as your primary beneficiary (it's usually required anyway). If you're unmarried, name anyone you want. Then name your children (or anyone else you want) as secondary/contingent beneficiaries.
Now this assumes your beneficiaries are in good shape and you don't have any major concerns about how they would handle an inherited retirement account. However, if you do have significant concerns, then you may indeed wish to name your living trust as the beneficiary. While it may cause a small administrative burden for your trustee, it might be better than naming an irresponsible beneficiary to your retirement account.
You can also change your mind over the years. For example, while my children are young, I've named my living trust as secondary beneficiary on my retirement accounts. However, once my children get older and have good heads on their shoulders, I will probably name them directly instead of naming the living trust. That would probably make life easier for everyone.
If you need help with your estate plan, feel free to contact us at (661) 414-7100.
While it is very important to make sure most of your assets are "IN YOUR TRUST," there are several assets that typically don't belong "IN THE TRUST." These assets usually pass by way of a designated beneficiary.
These are usually tax-deferred accounts. Examples of assets that do NOT go into your trust are IRAs, 401k, 403b, and pension plans. These assets pass by way of “beneficiary” pursuant to contract with the particular institution. In most cases, you should name your spouse as primary beneficiary (or anyone you want if you are single) and then name your children as secondary beneficiaries (or anyone else you want if you don’t have children or wish not to include them).
If your children are too young or you have significant concerns as to how they would handle such assets, you can name your trust as secondary beneficiary (sometimes called the “contingent” beneficiary). You may want to use the specific sub-trusts designated for your children so each child’s age will govern the amount necessary to withdraw. Otherwise, the age of the oldest trust beneficiary may govern the distribution to all beneficiaries.
If you name a child directly, one important question to ask these institutions is “What happens if one of my children dies?” Some companies will give 100% to the remaining named children. Some will give that deceased child’s portion to any grandchildren (children of that child). This is known as “right of representation” or “per stirpes” (Latin). In other words, they may have an internal policy about this issue. In some cases, you may find a place on their beneficiary form where you can indicate your preference. If they don’t have any such thing on their form, ask them if you could write it in.
Some companies won’t allow you to do so, and in that case you just need to make sure you change your beneficiaries if someone was to pass away. As a general rule, naming human beings as beneficiaries of such assets is preferred to naming a trust, because naming a trust can lead to unnecessary complications and burden for the trustees. Make sure you discuss your options with your attorney and your financial/tax professionals.
If you need help creating an estate plan for your family, call our office at (661) 414-7100 to make an appointment.
by Robert Mansour
An IRA is an Individual Retirement Account. When it comes to putting assets in the name of your trust, an IRA is an asset that you will not transfer to your trust. A trust cannot own an IRA. It must be owned by a human being. IRAs pass instead by way of designated "beneficiary." That means, when you set up the retirement account, the financial institution would have asked you who you want to name as your beneficiaries. In most cases, you will be able to name a primary beneficiary along with a secondary or "contingent" beneficiary. One of the benefits of the estate planning process is making sure you actually have the correct beneficiaries you wish to have. Also, many people are surprised to discover they only have a primary beneficiary and no back-up beneficiaries (secondary or contingent). In some cases, they have the entirely wrong people named. The estate planning process forces you to check on this issue (not only for your IRA accounts but you should also check any other assets that pass by way of a named beneficiary).
There are some situations when naming an individual would not be the best idea. In some cases, naming a trust as a beneficiary is a good idea. For example, you might be concerned how a child would handle the inherited IRA. However, to do so, a trust must meet certain minimum requirements. Also, naming the entire living trust versus subtrusts within the living trust may not be a great idea. Sometimes, it is better to name certain subtrusts instead. For example, instead of naming your entire trust as the beneficiary, you can say "Subtrust for Johnny Smith, per the Smith Family Trust dated 3-27-12." Otherwise, the oldest living beneficiary of your living trust may govern distributions for all those named and that might not be what you want. You can also set up a stand-alone IRA Trust to receive the distributions. This is the cleanest but more expensive route. Make sure you discuss these options with an experienced estate planning attorney.