Trust Attorney Las Vegas | IRA Beneficiary Designations?
Good morning and welcome to trusted. This is your host Blake Johnson. I’m assuming you’re listening to this in the morning cause that’s when I’m recording it. But welcome nonetheless. And today I want to talk about how, uh, with a trust or, uh, any, uh, retirement account, how, how you name beneficiaries if it’s a trust or an individual, how that’s gonna play out. Because I think it’s one of the more confusing aspects and it’s not like life insurance where you name a beneficiary and it just goes to them right away and they can have some options to take it out over a couple periods or um, you know, get a lump sum. But with IRA and 401k designations with your, uh, as far as the beneficiary goes, there’s a lot of Trust Attorney Las Vegas, uh, information that you have to know to make that decision. And you’ll always hear most financial advisors, they’ll say, well, you want to do it this way because that’s the best tax savings way.
And that might be the case as far as the best tax saving way, but it doesn’t necessarily mean it’s going to be the best fit for you because we’re gonna have to take into consideration things like the age of the beneficiaries. Um, are we talking about spouse splitting it with kids from a prior marriage and you know, all the things, the, the nuances that go into that, uh, because it does help determine what’s going to be the best fit. Tax situation isn’t always the number one priority. And so we want to make sure we address that right away Trust Attorney Las Vegas. So when you leave, uh, when you name a beneficiary on a retirement account, uh, let’s just say it’s an IRA works the same with a 401k. Uh, you have required minimum distributions that you need to take for IRAs. And those have to be started on, uh, April 1st of the year after the IRA owner reaches 70 and a half, and that’s called the required beginning date.
And if you, uh, if you name a beneficiary and you die prior to that required beginning date, then um, you know, there’s options of whether you can take it out over uh, uh, your lifetime. Or you could have it start on the date that the, that the original owner would have turned 70 and a half. If it’s after that required beginning date, then you have to start taking it out or right away. Now if you have a single beneficiary, meaning one individual listed as the beneficiary of the IRA, they can begin receiving distributions based on his or her life expectancy. And that’s determined by the, the treasury United States treasury to regulations, a single life table and they’ve laid that out. How that’s going to be determined if you have multiple beneficiaries, the default is that you take the oldest beneficiaries life expectancy and that’s used to calculate the required distributions.
So this is where if it’s being split between a spouse, kids from a prior marriage, those kids have to take it out over their share over the spouse’s lifetime, which is much shorter. So they’re going to be taking that out more quickly and having more tax owed instead of taking out over their lifetime. And what I mean by taking the distributions, that means not waiting until they’re 70 and a half. It means they have to start taking distributions right away so they don’t get to, um, to wait. And so that, you know, that that year after the person dies and they, they’re in, they have a beneficial interest in the IRA or 401k, they need to start taking those distributions, uh, because they are that Trust Attorney Las Vegas, that’s what’s required because the government wants to get their taxes collected on that money that’s been sitting there. Now, the one exception to that is if you name a spouse as a sole beneficiary, if they are the sole beneficiary of that, uh, the IRA, then they can, um, uh, they can take it out over their lifetime and they can wait until, um, uh, they are, uh, 70 and a half.
And so it becomes basically their IRA at that point. So that is the one exception where we say, all right, we probably, if we can name a spouse as the sole beneficiary of that IRA, and I think I didn’t confuse people, we are just talking about IRA as I should have. I shouldn’t have said 401k is in there. Um, if they’re the sole beneficiary of an IRA, then they can take it out over their lifetime because it becomes theirs. That is the only exception. Now let’s talk about what it looks like with trusts. If a, an IRA names a trust as a beneficiary. Uh, most advisors don’t realize they think, Oh, you have to take it out either right away. And so it’s gonna trigger all the tax or you have to take it out over a five year period. And that’s not true. If the trust qualifies as a look through trust, and what we mean by that is there’s a few qualifications that have to be met so that it can be considered a look through trust.
And those qualifications are, it must be valid under state law. The trust me must be irrevocable and any living trust becomes irrevocable when all the trust doors die. So that’s easy to get. The beneficiaries of the trust, um, must be identifiable from the trust instrument. So you can’t just say, you know, I’m going to say my whole group of grandkids, but if you named the kids by, by name, even if you do a group that’s usually pretty easy to identify. It’s stuff that you know, is, is vague or it’s continuing on. I want it to be for, you know, any errors that ever come up for their education or something like that that would not qualify. But if you name a child or if you say all of my children, that’s a class we know, you don’t have any more children outside of the stranger, there can’t be any more born down the road.
That would be, that would qualify as identifiable. Uh, the document and the trust document must provide, be provided to the plan administrators. So that’s the, the person who runs the IRA, the company that does that, and um, the list of the beneficiaries must be presented to them by October 31st in the year after the death. So you do, you have a deadline and all beneficiaries, the trust must be individual. So you can’t say companies or charities or anything like that. So that’s what makes a, um, uh, a qualified trust. And if you do that, then we, uh, you can go through the trust and have it be, go to the individuals. Now there is still the restriction that it fits multiple beneficiaries, then you have to base it off of the oldest beneficiary’s lifetime on that life expectancy table. So if you have siblings that are all within, you know, a few years of each other, that’s not a big deal.
You can have a go through the trust and it’s not really gonna create anything different. Now, if, uh, you know, there’s a big gap there, or like I mentioned before, the spouse and kids, um, then it might make sense to name them individually, not have it go through the trust. But the other problem with that is you’re going to have the issue of what happens if one of the kids passes away. Well, the default is just all the survivors share that part equally. And so the grandkids at that point would be disinherited or if a spouse dies and they have separate kids and it’s supposed to go to them within that IRA designation form, you can’t specify who gets their share. It’s just going to go to the, to the other kids. So it’s more if it’s more important to make sure there’s contingencies in place.
That’s where the trust can come into play and specify those um, contingencies within that document because you can be a lot more detailed as far as how the beneficiaries go. Other concerns you may have is if you have minor children, as soon as they are turn 18 they’re going to have access to all that money. If you name them as a beneficiary, they can, they have take the distributions and the tax and then the guardian would manage it for their benefit until they turn 18 but once they turn 18 they have access to that. They can liquidate it causes a huge tax burden and then go spend it on, you know, a new car or something, you know, a big trip or something like that. So if you can designate it through a trust, even though it may not be as tax a tax advantage, you can protect that money because it goes into the trust.
It’s continues to grow and is invested for their benefit to pay for education. Um, you know, help them get a new, uh, get a down payment on a house or something like that. So they, they get to a place where they’re able to handle that kind of money. And then at the certain age, you say 25, 30, 35, even 65. So they have to work their whole life, then they get the money and the trust can allow you to do that Trust Attorney Las Vegas. Whereas just naming them as a beneficiary on IRA designation form, um, does not, uh, does not you to do that, doesn’t provide that protection. So I know that’s a lot of information. It’s kind of confusing, but this is why, uh, you know, a trusted, we try to talk to, um, we want to talk to your financial advisor, we want to talk to your CPA and we want to see whether the tax consequences of that.
But we also want to advise, uh, individuals and families on what’s going to happen outside of the task tack. No, I can’t talk to the tax aspect because it may not be the top concern or the, the main thing at that point, the tax is going to get paid at some point with an IRA. That’s the reality of it. It’s been tax deferred for so long that the government’s going to get their money somehow. And so whether they get it now or later and you know, hopefully there’s money set up, other, other money set up to help pay for a kid’s ongoing expenses and this can just be a bonus. Um, so I don’t think that that necessarily needs to be the top priority unless, you know, all the kids are grown and they do have a high tax bracket or something like that, then it, then that might make sense to do, do the tax planning that way.
But I don’t want it to be the only consideration. A lot of times advisors, um, they’re just trying to brush through, they’re just going to say, Oh, yep, no, this is the way it needs to be done. This is going to be the best one for you. But they don’t take into consideration all the other aspects of the trust of your state plan of, you know, what you’re trying to accomplish with your vision and everything else. And so you want to find trusted advisors that can help you with that and that are willing to talk. It should be a team effort. Financial advisors, Trust Attorney Las Vegas, insurance agents, uh, CPAs, attorneys, all that we should work together to make sure that everybody’s on the same page, that we have the same goals. And so I’m not telling clients one thing and then they go back and they’re financial advisors saying, Nope, you have to do it this way.
Or you know, you don’t want to do that. And they, you know, undermining the plan. And so that’s, that’s why we try to work with trusted advisors that know and communicate and are willing to be and have that team approach to make sure we accomplish what’s truly important to you and what’s gonna be the best priority. Um, you know, in the long run. So that’s IRA designation is, once again, I’m sorry for confusing people by saying a 401k is the beginning. Sometimes those have different rules. Uh, this is, uh, how IRAs play out. So thank you for listening to trusted Trust Attorney Las Vegas. As always, if you can subscribe and like our podcast, we’d love that. We’d also love reviews and comments as far as what kind of stuff you’d like to hear in the future. We’ll talk to you next time.