Should Your Trust Be the Beneficiary of Your IRA or 401(k)?

Most people name a spouse or child directly as the beneficiary of their IRA or 401(k). It is simple. The account transfers without probate. And in straightforward situations, it works well. But should a trust be the beneficiary of your IRA instead? The answer depends on how much control you want over what happens to those funds after you are gone.

But naming an individual means you have no control over what happens to those funds once they are inherited. If your child gets divorced, the inherited account could become part of the settlement. If they have creditor problems, the money is exposed. If they are young or not great with money, they could drain the account in a year.

We see this regularly with the families we work with. A parent leaves a $400,000 IRA to two adult children. One is responsible. The other cashes out their half in six months, owes $35,000 in taxes, and has nothing left within a year. A trust would have prevented that.

A trust as retirement account beneficiary is not for everyone. But in certain situations, it is the only way to protect the people you are trying to provide for.

Minor Children

A 16-year-old cannot manage a $300,000 inherited IRA. Without a trust, a court-appointed conservator controls the account until the child turns 18, then the full balance becomes available all at once. A trust lets your chosen trustee manage distributions responsibly until the child reaches an age you specify, whether that is 25, 30, or later.

Blended Families and Second Marriages

This is one of the most common situations where a trust is necessary. Say you remarried and want your surviving spouse to have income from the IRA during their lifetime, but the remaining balance needs to go to your children from your first marriage. A direct beneficiary designation gives your surviving spouse complete control. If they change the beneficiary to their own children, yours get nothing. A trust (often structured as a QTIP or marital trust) locks in both goals: income for your spouse now, remainder to your kids later.

Spendthrift or Creditor Concerns

If a beneficiary has a history of financial difficulty, creditor issues, or spending habits that worry you, a trust shields the funds. Distributions happen on a schedule or at the trustee's discretion, not in one lump sum.

Special Needs Beneficiaries

A beneficiary who receives Medicaid or SSI can lose eligibility if they inherit a retirement account directly. Even a $50,000 inherited IRA can disqualify someone from benefits worth far more over their lifetime. A properly drafted special needs trust provides support without disqualifying them from government benefits.

Asset Protection

Trust assets are generally better protected from a beneficiary's divorce proceedings, lawsuits, or bankruptcy than assets held in an inherited IRA. Arizona does exempt inherited IRAs from creditor claims during the account owner's life, but that protection has limits once the money is distributed.

Before 2020, non-spouse beneficiaries could stretch inherited IRA distributions over their own life expectancy. A 30-year-old inheriting a $500,000 IRA could take small distributions over 50+ years, letting the bulk of the account grow tax-deferred. The SECURE Act of 2019 ended that for most beneficiaries.

Now, most non-spouse beneficiaries must empty the inherited account within 10 years of the IRA owner's death. This applies whether the beneficiary is named directly or through a trust. For that same $500,000 IRA, the beneficiary now has to pull out roughly $50,000 a year. If they are in their peak earning years, that extra income can push them into a higher tax bracket.

SECURE 2.0 (2022) made additional adjustments, including raising the age for required minimum distributions (RMDs) to 73 (and 75 starting in 2033), but the 10-year rule for inherited accounts remains.

Exceptions to the 10-Year Rule

Certain beneficiaries still qualify for the older, more favorable stretch rules. These are called eligible designated beneficiaries (EDBs) under IRC § 401(a)(9):

The Roth IRA Difference

Roth IRAs change the math in an important way. Because Roth distributions are tax-free, the 10-year rule still applies to inherited Roth accounts, but the tax cost of pulling money out is zero. That makes a trust less necessary from a tax planning standpoint. The protection benefits still apply, but you are not racing to minimize a tax bill during the distribution period. If your retirement savings are split between traditional and Roth accounts, the Roth accounts are usually better left to direct beneficiaries while the traditional accounts may benefit from trust protection.

The See-Through Trust Requirement

If your trust is properly drafted as a "see-through" (or "look-through") trust, the IRS can identify the individual beneficiaries behind the trust. That means the trust can use the same distribution timeline as if those individuals were named directly.

If the trust is not drafted correctly, the IRS treats the account as if it has no designated beneficiary. In many cases, it means the entire account must be distributed within five years. For a $500,000 IRA, that is $100,000 a year in taxable income your beneficiaries were not expecting.

If you decide a trust should be the beneficiary of your retirement account, the trust must meet specific IRS requirements to qualify as a see-through trust. These are not optional, and missing even one disqualifies the trust from favorable treatment under Treasury Regulation § 1.401(a)(9)-4.

Missing any of these requirements means the account is treated as having no designated beneficiary. That forces accelerated distributions and significantly higher taxes for your family.