View Mobile Site

Ask the Expert

Signal Photos


Jerry Citarella: Trusts as retirement plan beneficiaries, Part II

Financial Truth

Posted: May 15, 2012 1:55 a.m.
Updated: May 15, 2012 1:55 a.m.

Editor’s note: Part two of a two-part column.

Last week, I began discussing the benefits and disadvantages of using trusts as your retirement plan beneficiary. I didn’t even come close to getting through it. In fact, if I were to try to highlight all of the details and options in this second column, I still wouldn’t get through all of it. I believe learning the basics and then working with a qualified adviser to create the plan that’s right for you is best.

In this column, I’ll include what’s necessary to get you started in the right direction. Please take what I give you and explore it further if you think it can improve your situation.

The decision to have a trust as beneficiary is based on a number of factors. At its most basic level, you have to consider income taxes, estate taxes, flexibility, protecting minors and, of course, control. Beyond these considerations, the basic living trust might not be the best structure to receive the assets. Typically, this is what people use, but there are better options, especially if you’ve planned well and have substantial assets.

To get the most benefit from appointing a trust as beneficiary, consider using what’s known as a “look through” or “see through” trust, which acts as a conduit and will actually qualify the trust as a beneficiary rather than accumulating assets to be distributed to the eventual beneficiaries.

Confusing, right? I know, but stay with me.

If an individual is the beneficiary of the trust, assets received are typically taxed at the beneficiary’s tax rate. The beneficiary also has three options: 1) taking the money immediately, 2) over a five year period or 3) stretched out over a lifetime.

On the other hand, if a basic living trust is the beneficiary, the tax could be the most negative result. The money received will potentially be taxed at the trust’s tax rate, which could be much higher than the tax rate of the individual(s) ultimately receiving it.

Also, some or all of the flexibility of taking the money over time could be forfeited. The possible solution would be a trust truly classified as a beneficiary, as I mentioned above.

Having a “conduit” or “look through” trust as your retirement plan beneficiary offers similar flexibility to having an individual beneficiary, but can give you additional tax benefits if needed.

Regarding distribution: Generally, if things are set up correctly, the assets received can be distributed over the life of the oldest beneficiary, thus spreading the money and the tax out. This plan can be beneficial, but in all cases, working with a qualified professional is vital.

This is a complex topic, but for now, I’ll end this discussion with two very common and important situations to consider.

The first is having a trust as the beneficiary of your retirement plan in place of your spouse. This one is fairly simple: A spouse beneficiary has all the options of any typical individual beneficiary with one additional benefit.

At the death of the spouse/plan participant, the beneficiary has the option to continue the plan as if it were his/her own. This is commonly referred to as a spousal continuation plan. The tax deferral will remain intact, and all other rules of the plan apply going forward. This is a valuable option if the spouse may not need to take the money immediately.

The second situation is that of having minor children or anyone else who you wouldn’t want to have access to the money or complete control of where it’s placed. Using a trust in this situation can actually control how much and when the beneficiaries receive the assets. They would not control it.

This option is often used to help assure the money would not be wasted, as is sometimes the case when less experienced people receive large sums of money for the first time.

We’ve only scratched the surface of this topic. Please do not take this as specific tax or legal advice. These options should be considered carefully, and I must reiterate that qualified advice is necessary. Plan well!

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.


Most Popular Articles

There are no articles at this time.
Commenting not available.
Commenting is not available.


Powered By
Morris Technology
Please wait ...