Alexandria, VA Estate Planning Blog

Tuesday, July 13, 2010

Should I fund My Retirement Benefits (e.g., IRA, 401(k)) Into My Trust?

Should I fund my retirement benefits(e.g., IRA, 401(k)) into my trust?

Answer: Sometimes, but even under those occasions, only if you are instructed to do so by an experienced and highly competent estate planning attorney.

(We make no statements or guarantees regarding the advisability of doing so)

Retirement benefitsfrequently qualify for some type of preferential income tax treatment. However, said favorable treatment comes with many strings attached. Additionally, some plans only allow a participant (and not the beneficiary) to stretch-out the benefits.

Generally trusts are impermissible beneficiaries. It is possible to fund particular retirement assets into trust and preserve the tax deferred benefit (stretch-out). However, the trust must be narrowly tailored and drafted with extreme particularity to qualify for see-through trust treatment. 

Assuming that your trust has been drafted correctly, you will need to correctly identify it as a beneficiary (typically on the beneficiary designation form). Assuming you do that, you must ensure that you have the correct beneficiaries named within the trust. Failure to correctly choose allowable beneficiaries (designated beneficiaries) or to craft the terms of their rights to, and succession in, the benefits, will likely invalidate or unnecessarily waste the tax deferral benefits. In addition, there are many other rules that could result in very negative tax consequences.

In sum, if you are considering funding your trust with your retirement benefits, you should immediately seek counsel from an experienced and highly competent estate planning attorney. Never go it alone. Never draft the trust yourself and never fund it without precise and express supervision by an experienced and competent estate planning attorney. 

Drafting and funding a trust with retirement assets, while simultaneously preserving and maximizing the stretch out, is an enormously complicated task that should be reserved for only very skilled estate planning attorneys. If you have any questions, please don’t hesitate to contact our office and we can schedule a consultation.

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