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Jerry Citarella: Trusts as retirement plan beneficiaries – yes or no?

Financial Truth

Posted: May 8, 2012 1:55 a.m.
Updated: May 8, 2012 1:55 a.m.

There are so many things to consider when determining what’s needed to achieve your goals and protect your family and assets. A big part of responsible planning is setting up a living trust.

I wrote a column last year discussing trusts and who might benefit by having one. Today, I’m going to touch on the reasons you might want to name your trust as the beneficiary of your retirement plans, and of course, why you might not.

The first thing I must remind you of is this: Living trusts are not just for rich people. Things discussed in this column might help you understand why.

In simple terms, a living trust is a document that, when created, can effectively hold or receive your assets. It’ll hold assets while you’re alive, and it can receive them once you’re deceased.

While alive, control of the assets can remain yours, but having them held in trust allows them, among other things, to pass to your heirs without probate upon your death. Probate can be costly and time consuming. Avoiding probate is generally advantageous. 

Where it gets interesting is in relation to retirement plans. Can a trust own a retirement plan and, secondly, should a trust be named as the beneficiary?

The first question is simple to answer. No, a trust generally can’t own a retirement plan.

Traditional retirement plans already have a custodian who acts as owner for the benefit of the participant. Some self-directed IRAs use a trust document in place of a custodian, but, ultimately, they serve the same purpose. Due to their unique nature, retirement plans are permitted to pass to heirs without probate, through a beneficiary designation.

Since the trust doesn’t hold the retirement asset, should it be the beneficiary of the asset? Let’s explore this.

A living trust is designed to give specific instructions for directing assets to heirs. It can include equal or unequal shares and instructions for specific items. It can highlight special instructions for minors. It can even incorporate multigenerational instructions detailing how the assets pass down to more than one generation. With so many benefits, why wouldn’t you want the trust to receive the assets at death? The reasons are: flexibility and potential taxes.

I’ll say that, if your beneficiaries are minor children, it often makes sense to have the trust as the beneficiary to help control distribution of the assets, as well as how they’re controlled and even invested.

If your beneficiaries are adult children or another adult, there are more things to consider, and if the beneficiary is your spouse, it adds yet another element. As usual, there are lots of decisions that need to be made, but the first step is to truly understand the options.

Well, here’s what’s fun about writing this column: As I’m writing, I’ve realized this living-trust information needs to be delivered in two parts.

I’m currently on a plane headed to Phoenix for an educational conference, where I’m one of the speakers, but there are about 15 other sessions I’ll be sitting in on.

Perhaps I’ll learn a little more about trusts as beneficiaries and make part two of this topic even more informative.

For now, I hope this first part helped you understand a bit more about the topic, and I look forward to completing part two. Be sure to pick up the paper next week or go to The Signal website to read the conclusion.

In the meantime, if you have any questions about this topic or any other financially related topic, please feel free to email me or reply online.

I’ve enjoyed all the questions I’ve received so far and have used some of them to create my columns. Thanks for your support and interest.

Jerry Citarella is the owner of Infinity Wealth Management 23734 Valencia Blvd., Suite 301, Valencia, 661-255-9555, ext. 11.  He is also the author of The Truth Helps Series of financial planning books. Mr. Citarella’s column reflects his own views and not necessarily those of The Signal. Submit questions to:  Securities and investment advisory services offered through NEXT Financial Group, Inc. Member FINRA/SIPC.  Infinity Wealth Management is not an affiliate of NEXT Financial Group Inc.


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