I want my 401(k) and IRA to go to my spouse when I die — should I name them or my trust as beneficiary?

As is the case with many questions regarding legal matters, this depends on some different factors. It is more simple to name your spouse directly, and your spouse could then convert your retirement plans to their IRA and take withdrawals on their schedule.

That being said, trusts have a number of advantages. Trusts can provide a lot of protections, including greater creditor protection compared to retirement funds, protection in the event your spouse becomes incapacitated, protection from scams (as seniors are often targeted), and protection of assets from having to be spent paying for long-term care. They can also preserve funds that are not needed by your spouse for your children.

Trusts can also be a useful estate planning tool. As the threshold is just over $12 million, most Americans don’t need to worry about the federal estate tax. However, many states have their own estate taxes, including some with the threshold as low as $1 million. A trust can protect this amount from being taxed following the death of the survivor of yourself and your spouse.

The trust needs to be either a “conduit” or “accumulation” trust in order to hold retirement plan funds and qualify as a designated beneficiary. Conduit trusts are often recommended as they are much easier to draft and manage. With this type of trust, the annual required minimum distributions are forwarded to your surviving spouse. Accumulation trusts allow these to be retained in trust, but this kind of trust is complicated and often only used in special cases, such as when the beneficiary needs to qualify for public benefits.

Whether or not your retirement plans should be payable to a trust depends on what you want and your specific situation, including if you have reason to protect the funds that would go to trust or if there is an estate tax in your state. Even if a trust is better for your situation, you could also consider funding the trust with non-retirement assets and have your retirement fund pass directly to your spouse.

For help creating or updating your estate plan, contact us at Wilson and Wilson Estate Planning and Elder Law, LLC at 708 482 7090 for our main office in LaGrange, Illinois or at 847 656 8958 for our Northbrook, Illinois office.