I have a traditional 401(k), ROTH 401(k), ROTH IRA, a checking account, a savings account, a health savings account, and a taxable brokerage account. I’m in my early 30s and my total of all these accounts is less than $1 million. I believe I can designate a beneficiary for all of these accounts to avoid probate. But I don’t want to grant these accounts to beneficiaries outright. For one, most of the beneficiaries (my nieces and nephew) are minors. If I grant the funds to their parents (my sisters) I’m concerned that I cannot prevent them from squandering it. Plus I have other ideas for the funds too (making loans or investments in businesses started by the kids, etc.). A trust makes sense. What should I be wary of when naming a trust as a beneficiary as these types of accounts?
A trust is a wonderful vehicle to avoid probate and make sure that your beneficiaries will receive their inheritance in the time frame which you envision. Also, it preserves your privacy and the privacy of your beneficiaries because a trust that is created and funded during your lifetime will not have to be filed at the probate court which is open to public scrutiny.
Transferring your assets to a trust is relatively easy. For liquid assets, other than retirement accounts, you will need to open a new account and transfer the money to it. For real estate, a new deed will need to be prepared and filed at the registry of deeds.
By making the trust revocable, you can amend or revoke the trust in your discretion. During your life it will be a grantor trust. No additional tax return will be required. All income will be reported on your individual tax return (1040).
However, you do have to be careful about naming the trust as the beneficiary of your retirement accounts, especially if you have hold back provisions for minors. A trust can only attain the “stretch” if the trust is what is known as a conduit trust. This means that the trust must pay out all the distributions from the IRA and it will have to be withdrawn over the oldest beneficiaries life expectancy. If the trust is not drafted as a conduit trust, the trust must withdraw the entire balance of the IRA within a 5 year period, which could result in substantial income tax.
A lot of clients chose to have a non conduit trust and pay the taxes paid within the five year period to allow the successor Trustee the ultimate discretion when determining if and when payments should be made to or for the benefit minors. Some clients also plan on amending the trust after the beneficiaries attain the age of majority. All options are valid and should be discussed with the drafting attorney.
Margaret L. Cross-Beliveau, Esq., LL.M.
Legal Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on since each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship. A lawyer experienced in the subject area and licensed to practice in the jurisdiction should be consulted for legal advice.
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The attorneys at The Beliveau Law Group provides legal services for estate planning (wills and trusts), Medicaid (planning and applications), probate (estate and trust administration), business law (formation and operation), real estate (residential and commercial), taxation (federal and state), and civil litigation (in connection with these practice areas). The law firm has offices and attorneys in Naples, Florida; Boca Raton, Florida; Danvers, Massachusetts; Waltham, Massachusetts; Quincy, Massachusetts; Manchester, New Hampshire and Salem, New Hampshire.