Q: Is the IRA Trust a better option as beneficiary for 401K’s and other retirement plans than a living trust? I understand that the IRA stretch out is why the IRA Trust works for IRAs. But I don’t see any benefit to naming the IRA trust as the beneficiary of the 401k or other retirement assets. Do you disagree? If so, why?
A: In general, you are correct. 401K’s and other qualified retirement plans do not benefit from maximizing RMD stretchout, which could be achieved for IRAs under the standalone IRA Beneficiary Trust and 401K’s and QRPs may be afforded the same asset protection for individual beneficiaries if paid to a properly constructed Living Trust beneficiary subshare trust.
However, there may be a little-used advantage to the standalone IRA Beneficiary Trust as beneficiary – – the post-death Roth IRA conversion of the 401K or other QRP. The Trustee can make this occur and then provide under the IRA Trust for RMDs to receive both maximum stretchout and asset protection in a way that a Living Trust subshare trust may not. Another reason we prefer to name the IRA Trust as beneficiary is purely psychological. If the 401K/QRP participant has named the IRA Trust as beneficiary, then when the participant retires and rolls over to an IRA, it is more likely that the participant will name the IRA Trust as beneficiary of the rollover IRA.
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