Beneficiaries & 401k’s and Trusts
I am middle aged and single income earner. I have a good amount saved in my IRA and 401k and I want to preserve this if I die prematurely. I am often confused by what I read if regarding the beneficiary to add on my 401k and IRA. Currently I have the beneficiary as my wife and the contingent beneficiary my (2) children. I have a REvocable Living Trust. What is the recommendation? Do I leave the beneficiaries in tact or do I add the beneficiary as the Trust.
thanks
Scott
Permalink Submitted by Alan Spross on Sun, 2010-01-31 19:11
The basic purpose for an RLT is to avoid probate, but there are several other potential uses for various trusts. SInce retirement assets already avoid probate, you would not need a trust to receive the plan assets. But if you have kids from a prior marriage or a concern that leaving the assets to your wife would not be wise, if you have a special needs child that will be on Medicaid, or if you think your assets will be high enough to incur estate taxes, various trust setups should be investigated with a trust attorney.
In some cases, you can also have a trust created at your death, and let your wife decide based on current circumstances, how much of the assets she should disclaim to the trust, which would be named as a contingent beneficiary on the plans.
In summary, do not name the trust as a retirement plan beneficiary unless you have a specific need, and there are too many potential needs to cover them all here. Note that RMDs from retirement plans that are held in the trust will be taxed at a much higher rate than those that pass through to beneficiaries or are left outright to beneficiaries.
Permalink Submitted by Bruce Steiner on Sun, 2010-01-31 23:26
Without knowing more about the original poster’s assets and objectives, it’s not possible to say what he should do. But since he says he has “a good amount” of retirement benefits, he may want to consider leaving each child’s share (if any) of his IRA to a trust for the benefit of the child, instead of directly to the child. In that way, the child’s share will not be included in the child’s estate for estate tax purposes, and will be better protected against the child’s potential creditors (including spouses).
For more on this, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf.
Permalink Submitted by Raj mody on Tue, 2010-02-02 03:56
Question:
Say I have $200K in my 401K. I name my child as Beneficiary. Does this amount escapes from my Estate and as such Extate tax?
Does it also escapes Income tax on full amount – and My child will pay income tax as he withdraws?
Please comment with calculation for me to understand
Permalink Submitted by mk foss on Tue, 2010-02-02 05:06
Amounts held in your 401k account at death are part of your taxable estate, if there is an estate tax. If you do not have enough assets to file an estate tax return – no estate tax is imposed. The estate tax applies to a very small percentage of U.S. residents.
Whoever inherits a retirement benefit must pay income tax on it. Most people prefer that their beneficiaries take it out over their life expectancies. If you son were to take the retirment assets over his life as determined by the IRS tables, the tax would be relatively low. Cashing it out all at once will accelerate the income tax.