Pros and cons of naming a trust as retirement plan beneficiary

| Mar 13, 2015 | Trusts |

Comprehensive estate planning generally involves more than just drafting a will, although will creation is a great place to start. Many Oakland County residents have a range of needs and plans they want to prepare for and careful estate planning can help them achieve their goals. Trusts and trust administration can be an important component of estate planning, but many people are not aware of the functions they can serve.

A revocable trust is a trust that a person creates during his or her lifetime and that generally allow the creator to revoke or amend the trust at any time. Due to its particular characteristics, many people wonder about the use of trusts in relation to their retirement plans. One of the ways a trust can be used, in relation to retirement planning, is to name the trust as the beneficiary of a retirement account. Two of the main reasons why someone would name a trust as the beneficiary are because it is convenient and provides a degree of certainty. Using a trust in this way can also be beneficial for beneficiaries who may be unable to manage retirement benefits well due to their age or other factors.

Despite these benefits, there are potential consequences to naming a trust as beneficiary, however. One potential consequence is that assets may be unnecessarily encumbered, or “entrusted,” in situations where a beneficiary is fully able to manage his or her affairs properly. Certain circumstances may also result in negative tax treatment.

In the majority of cases, the potential consequences associated with designating a trust as the beneficiary of a retirement can be eliminated or resolved with careful planning. It may not be helpful to overlook trusts simply because there are potential pitfalls; such an approach would ignore the potential benefits of using trusts in estate planning. This is where competent estate planning becomes invaluable. It allows people to take advantage of the existing legal mechanisms to best suit their needs and protect their interests.

Source: Michigan Bar Journal, “Estate Planning with Retirement Assets,” Christopher M. Brown and Christopher J. Caldwell, Dec. 2006

Archives