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

Dear Harry,

I am married and I want all my assets to go to my spouse. I have a revocable trust that survives my death in favor of my spouse. Should I designate my spouse or trust as a beneficiary of my 401(k) plan and IRA?

Dear Reader,

As with most legal answers, it depends. It’s certainly easier to call your spouse directly. Then they can convert the retirement plans into their own IRA and make payouts on their own schedule.

However, trusts have some advantages. They can offer better creditor protection than pension funds. You can keep any funds your spouse doesn’t need for your children, if you have any. This can be particularly important in second marriages. Trusts can also provide protection if your spouse becomes disabled at a later age. It can provide protection from scams, for which seniors are a particular target, and protect assets from having to be spent on long-term care.

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

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In order for a trust to hold pension plan funds and qualify as a designated beneficiary, it must be either a “conduit” or an “accumulation” trust. Conduit trusts are much easier to design and manage. They provide for the minimum annual distributions required to be passed on to your surviving spouse. Accumulation trusts allow these to be held in escrow, but due to the complicated nature of these trusts, we generally only use them in special cases, such as when the beneficiary needs to be eligible for government grants.

Whether your pension plans should be paid into a trust depends on your circumstances – 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 savings and have your retirement savings passed on to your spouse.

In Massachusetts, where I practice and where we have the low estate tax threshold, we typically advise clients to designate their spouses as the primary beneficiaries of their estate plans and their trusts and as secondary beneficiaries. This allows the surviving spouse to choose whether to receive the retirement plan directly or pass it on to the trust by signing a liability waiver. A disclaimer allows the surviving spouse to treat certain property as if they died first. In this case, a liability waiver would allow the surviving spouse to pass on some or all of the pension plan funds to the secondary beneficiary, the trust. This allows them to determine when more facts become available about the amount of funds they have available, their potential inheritance taxes, and the likelihood that they will need long-term care or be the subject of a lawsuit.

Harry S. Margolis practices elder law, estate and special needs planning in Boston and Wellesley, Massachusetts and is the majority owner of He is the author of The Baby Boomer’s Guide to Trusts: Your All-Purpose Estate Planning Tool and answers consumer questions about estate planning issues at Should I name my spouse or trust as the beneficiary of my 401(k) and IRA?

Brian Lowry

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