Should I name my spouse or my trust as beneficiary as my 401(k) and my IRA?

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Dear Harry,

I am married and I want my entire estate to go to my spouse. I have a revocable trust that will continue for the benefit of my spouse upon my death. Should I designate my spouse or my trust as the beneficiary of my 401(k) plan and my IRA?

Dear reader,

As with most legal answers, it all depends. It is certainly easier to name your spouse directly. Then they can convert the retirement plans to their own IRA and make withdrawals on their own schedule.

However, trusts have certain advantages. They can provide better creditor protection than that afforded to pension funds. They can keep funds your spouse doesn’t need for your children, if any. This can be particularly important in the case of second marriages. Trusts can also provide protection in the event your spouse becomes disabled at a later age. It can provide protection against scams for which the elderly are particular targets and prevent assets from being spent on paying for long-term care.

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Trusts are also used in estate tax planning. Few Americans now have federally taxable estates with the threshold at just over $12 million. But a number of states have their own estate taxes, with a threshold as low as $1 million in Massachusetts and Oregon. If you live in one of these states, a trust can protect this amount from taxation on the death of the survivor of you and your spouse.

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In order for a trust to hold the funds of a pension plan and qualify as a designated beneficiary, it must be an “intermediate” or “accumulation” trust. Driving trusts are much easier to draft and manage. They provide that the required minimum annual distributions are passed on to your surviving spouse. Accumulation trusts allow them to be held in trust, but given the complex nature of these trusts, we generally only use them in special cases, such as when the beneficiary needs to qualify for public benefits.

Whether your retirement plans should be payable to a trust depends on your situation – whether there is a reason to protect the funds that would go to the trust or whether you live in a state with an estate tax. Even if you do, you may be able to fund the trust with non-retirement assets and pass your retirement funds to your spouse.

In Massachusetts, where I practice and where we have a low estate tax threshold, we generally advise clients to name their spouse as the primary beneficiary of their estate plans and trusts and secondary beneficiary. This allows the surviving spouse to determine whether to receive the pension plan outright or pass it to the trust by executing a disclaimer. A disclaimer allows the surviving spouse of designated property to be treated as if they had died first. In this case, a waiver would allow the surviving spouse to designate some or all of the pension plan funds to pass to the secondary beneficiary, the trust. This way, they can determine, when more facts are available, how much money they have, their potential inheritance rights, and the likelihood of them needing long-term care or being sued. .

Harry S. Margolis practices elder law, estate and special needs planning in Boston and Wellesley, Massachusetts, and is the majority owner of ElderLawAnswers.com. He is the author of The Boomer’s Guide to Trusts: Your Versatile Estate Planning Tool and answers consumer questions about estate planning issues at www.AskHarry.info.

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