IRA Trust as Designated Beneficiary to 401K
Husband is 57. Wife is 54. Real estate equity is $170,000. Wife has $50,000 in IRA/401K accounts. Husband has $1,800,000 in his 401K. Two children are listed as contingent beneficiaries on his 401K account. He does not want them to receive his 401K in a lump sum. Must we create a proper IRA Inheritance Trust and name it as the contingent designated beneficiary, to be sure the kids stretch the distribution over their respective lives? Can we accomplish this objective without using a trust?
Permalink Submitted by Alan Spross on Tue, 2009-07-14 19:43
You need a trust if you want to limit the distribution rate of an IRA or 401k to the beneficiary. However, if 54 year old spouse will be the primary beneficiary, unless there is a common disaster, these kids will be fairly old when they finally inherit the 401k funds. Of course, there may be other benefits for using the trust, such as creditor protection or keeping the account out of their estates.
Permalink Submitted by Bruce Steiner on Tue, 2009-07-14 21:22
While there are some special provisions needed for a trust to be a beneficiary of an IRA and be eligible for the stretchout, it’s not that different from the trust you would create for a child to receive non-IRA assets. It can even be contained in the Will. It shouldn’t cost significantly more than a Will without these provisions.
For more on this, see my article on this subject in the March 2004 issue of the BNA Tax Management Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf
Permalink Submitted by Joseph Arsenault on Mon, 2009-07-20 16:20
If the husband is eligible to move his 401k money to an IRA you may be able to use a Beneficiary Designated Restrictive Payout form as well. Just a thought.
Permalink Submitted by Bruce Steiner on Mon, 2009-07-20 16:24
A thought, but I don’t think a very good one. I have an article on that coming out in the September 2009 issue of Trusts & Estates. They essentially give you a menu of choices to pick from, but they’re not as flexible as they might be. With close to $2 million involved, it’s worth the effort to have the appropriate trust provisions drafted.
Permalink Submitted by Joseph Arsenault on Mon, 2009-07-20 16:40
I agree with 2 million involved it is probably best to spend the money drafting a trust that most appropriately fits the owners goals.
However, the restricted beneficiary forms may meet the goals of the owner on there own sometimes, in which case the a trust would not be needed. Thus, it would be worth entertaining as an option.
Permalink Submitted by Bruce Steiner on Mon, 2009-07-20 16:48
It’s not very likely that they’ll fit. It’s like randomly selecting a pair of shoes from a display.
I suggest waiting until my article comes out in September and then we can resume the discussion if necessary.
It doesn’t cost very much to include the special provisions necessary for a trust that receives IRA benefits in the Will or trust instrument.
Permalink Submitted by Joseph Arsenault on Mon, 2009-07-20 16:55
I have read some of you articles on CCH.
Let me know when your article is out.
Thanks Bruce.
-J
Permalink Submitted by Alan Spross on Mon, 2009-07-20 19:17
Another pitfall could well be locating an IRA custodian that would even accept such a customized beneficiary designation. For example, Vanguard will not even accept a simple survivor period of 30 or 60 days. My impression is that once an IRA custodian gets involved in litigation over beneficiary payouts, they rush to close the door on any additional situations on their books. The goal is to avoid litigation at all costs. Of course, an IRA that is large enough probably brings some leverage with it…….
Permalink Submitted by Bruce Steiner on Mon, 2009-07-20 19:25
Vanguard (like others) has gotten better over the years. We’ve gotten Vanguard (and others) to accept customized beneficiary designation forms many times. They and we have the same goal — to make sure that the beneficiary designation is not ambiguous, so that it’s clear who gets what.
Sometimes with a large institution, a low-level employee processes the beneficiary designation, and bounces it. But we can usually get to a higher level person who will accept it, or who will propose a minor modification and accept it with that modification.
Permalink Submitted by Alan Spross on Mon, 2009-07-20 20:08
Perhaps Vanguard has been somewhat chastened following this “incident”:
http://members.forbes.com/forbes/2007/0903/068.html
I can think of a few scenarios where their 2007 action would actually increase problems and potential litigation, but just based on the reaction I am sure that this situation has been resolved to a large extent by now.
Permalink Submitted by Bruce Steiner on Wed, 2009-07-22 02:59
I don’t think it’s any of Vanguard’s (or any other custodian’s) business who the IRA owner selects as beneficiary (perhaps with the exception of a beneficiary designation that’s ambiguous). But it’s generally not a good idea to earmark assets. For example, if you have some of your IRA in mutual fund A, with X as beneficiary, and an equal amount of your IRA in mutual fund B, with Y as beneficiary, you run the risk that by the time of your death, the two are no longer of equal value, because of changes in the market, or because of the way you took distributions. Occasionally, though, there can be a good reason to earmark assets.
Permalink Submitted by Alan Spross on Wed, 2009-07-22 04:42
Exactly, Bruce. I don’t think we can tell if Vanguard simply had a bad experience they were over reacting to, or whether they just wanted everyone to re visit and justify their beneficiary decision. I suspect that if the IRA owner convinced them they had good reason for their decision as opposed to an oversight, Vanguard would relent. A call from an attorney might well have resulted in Vanguard always relenting, as you indicated your success with them. But they may also have lost some business from people who considered the initial letter rather over the top.
Permalink Submitted by Kyra L on Mon, 2013-12-02 04:35
good…