How Retirement Accounts Fit Into Your Estate Plan (and Your Trust)

One of the most common questions I get after we’ve created a revocable living trust is whether retirement accounts like IRAs and 401(k)s should be retitled into the name of the trust. It’s a natural question. After all, we’ve just spent time making sure everything else is properly aligned with the trust, so it feels like retirement accounts should follow the same path.

In almost all cases, however, the answer is no. Retirement accounts should remain in your individual name. The reason has everything to do with how these accounts are taxed. IRAs and 401(k)s are tax-deferred vehicles, and the IRS treats them very differently from other assets. If you were to retitle an IRA into the name of your trust during your lifetime, the IRS would treat that as if you had withdrawn the entire account. The full value could become taxable income in that year, eliminating the benefit of tax deferral and potentially pushing you into a much higher tax bracket. If you are under age 59½, there could also be an additional 10% early withdrawal penalty. In short, retitling a retirement account is not just a paperwork change, it can trigger a significant and immediate tax event.

So if retirement accounts don’t get retitled, how do they pass at death? The answer is through beneficiary designations. Each retirement account has a form on file with the custodian (Fidelity, Schwab, Vanguard, or another institution) that directs where the account goes when you pass away. That designation controls the outcome, regardless of what your will or trust says. In fact, there is a clear order of priority in estate planning: beneficiary designations come first, then your trust or will, and only if neither applies do state intestacy laws step in. This is why keeping beneficiary designations up to date is so important. They are often the most powerful document in your entire plan.

For married clients, the most common and generally most effective approach is to name the surviving spouse as the primary beneficiary, with children listed as contingent beneficiaries. This structure allows the surviving spouse to take advantage of special rules that apply only to spouses. A spouse can roll the inherited IRA into their own IRA and treat it as if it had always been theirs. This preserves tax deferral, allows them to delay required minimum distributions based on their own age, and gives them full control over future planning. In some cases, a spouse may instead choose to keep the account as an inherited IRA, often if they are under age 59½ and may need access to the funds without triggering early withdrawal penalties. The key point is that spouses have flexibility that no other beneficiary has.

For children and other non-spouse beneficiaries, the rules are different, particularly after the SECURE Act. In most cases, inherited retirement accounts must now be fully distributed within ten years. The old “stretch IRA,” which allowed distributions to be taken over a lifetime, is largely gone. This means that while there is still some flexibility in timing, the window for tax deferral is much shorter, and the income tax impact of those distributions needs to be carefully considered as part of the broader plan.

Although naming individuals directly is usually the simplest and most efficient approach, there are situations where naming a trust as the beneficiary of a retirement account makes sense. For example, if beneficiaries are minors, a trust can provide a structured way to manage and distribute the funds. In blended family situations, a trust can help ensure that assets ultimately pass to the intended beneficiaries. Trusts can also be useful where there are concerns about creditor protection, divorce, or a beneficiary’s ability to manage money responsibly. In these cases, the trust acts as a layer of control and protection that a direct distribution cannot provide.

That said, naming a trust as the beneficiary of a retirement account introduces additional complexity. The trust must be carefully drafted to qualify under IRS rules, and the income tax consequences can be less favorable if the structure is not handled correctly. This is not a decision to make casually or based on a general rule of thumb, it requires careful coordination with the overall estate plan.

At the end of the day, retirement accounts sit at the intersection of tax planning and estate planning, and they require both disciplines to work together. This is one of those areas where close coordination between your financial advisor and your estate planning attorney is essential. When handled correctly, retirement accounts can integrate seamlessly into your broader plan. When overlooked or mismatched, they can create unintended and often costly outcomes.