Should You Include Your IRA or 401(k) in Your Estate Plan?
For many individuals, IRAs and 401(k)s represent significant portions of their net worth. Understandably, people want to make sure these assets are handled properly when they pass away. But should you include your retirement accounts in your estate plan? The answer isn't a simple yes or no. It depends on your goals, family circumstances, and tax planning needs.
In this blog, we’ll explain what it means to incorporate an IRA or 401(k) into your estate plan, the tax consequences involved, and why planning with a qualified estate planning attorney is so important.
What It Means to Include an IRA or 401(k) in Your Estate Plan
When we talk about including your IRA or 401(k) in your estate plan, we don’t mean transferring ownership of these accounts to a trust during your lifetime. That’s generally not allowed. Retirement accounts must remain in the name of the individual owner.
Instead, incorporating these accounts into your estate plan means making thoughtful decisions about who will receive them after your death and how. Most retirement accounts pass directly to beneficiaries named on a beneficiary designation form, bypassing probate and the instructions in your will or trust. That means these forms should be coordinated with the rest of your estate plan.
If your beneficiary designations are outdated, conflict with your trust or will, or fail to address special family circumstances, it can lead to unintended outcomes. For example, naming a minor child directly could result in court intervention, while naming your estate as the beneficiary may trigger unnecessary taxes and delays.
Tax Considerations and the 10-Year Rule
Understanding the tax treatment of retirement accounts is critical. Traditional IRAs and 401(k)s are funded with pre-tax dollars, grow tax-deferred, and are subject to income tax when distributed. Roth IRAs grow tax-free and generally provide tax-free distributions.
At a certain age, account owners must begin taking Required Minimum Distributions (RMDs), and after death, beneficiaries are subject to specific distribution rules. The SECURE Act significantly changed those rules.
Most non-spouse beneficiaries must now withdraw the entire balance of an inherited IRA or 401(k) within ten years of the original owner’s death. This is known as the 10-year rule. Withdrawals are taxed as income, and if large sums are withdrawn in a short time, beneficiaries could face higher tax brackets.
Spouses and certain other beneficiaries (such as minor children, disabled or chronically ill individuals, or those close in age to the account owner) may still stretch distributions over their life expectancy. But for most adult children or relatives, the 10-year rule applies.
This accelerated distribution schedule can create tax burdens. Estate planning can help mitigate this by spreading distributions or planning for charitable gifts, Roth conversions, or other strategies. A Roth conversion involves moving funds from a traditional IRA or 401(k) into a Roth IRA and paying income tax on the converted amount upfront. This strategy can reduce the taxable burden on your beneficiaries, as future withdrawals from the Roth IRA are generally tax-free—making it a valuable option when planning for heirs subject to the 10-year rule.
Should a Trust Be the Beneficiary?
In some cases, you might consider naming a trust as the beneficiary of your IRA or 401(k). This is common if:
Your beneficiaries are minors.
You want to protect assets from creditors or poor financial decisions.
A beneficiary has special needs or government benefit eligibility concerns.
However, naming a trust adds complexity. A trust must qualify as a "see-through trust" to receive favorable tax treatment. This means the IRS will look through the trust to the underlying individual beneficiaries when applying distribution rules.
There are two primary types of see-through trusts:
Conduit Trusts: These require that all distributions from the IRA go directly to the beneficiary. They can preserve the 10-year withdrawal period but don’t allow the trustee to retain funds in the trust.
Accumulation Trusts: These allow the trustee to hold the IRA distributions within the trust. This provides more control and protection but can result in higher taxes since trusts hit the top income tax bracket much faster than individuals.
If the trust does not qualify as a see-through trust or if the estate is named as the beneficiary, the account may be subject to more accelerated distribution rules and potentially higher tax consequences.
For married individuals, the spouse is often named as the primary beneficiary to take advantage of spousal rollover options and continued tax deferral. However, a trust may be named as a contingent beneficiary—especially if the surviving spouse predeceases or disclaims the inheritance—allowing the account to flow into the trust for minor children or other heirs, with terms that match the family’s broader estate planning goals.
Passing Retirement Accounts Outside the Estate Plan
Most retirement accounts are designed to pass outside of probate. Naming individual beneficiaries on the account keeps the process simple and efficient. The financial institution will work directly with the named beneficiary after the account owner’s death.
This means retirement accounts often avoid court involvement, stay private, and pass to heirs more quickly than other types of assets. For many families, this route is preferable.
However, problems can arise when:
No beneficiary is named, or all named beneficiaries are deceased.
Beneficiary designations conflict with estate planning documents.
Beneficiaries are not well-suited to receive large sums directly.
This is why integrating retirement account planning with your overall estate plan is essential, even though the accounts themselves pass outside the will or trust.
The Drawbacks of Naming a Trust as Beneficiary
While naming a trust as the beneficiary of your IRA or 401(k) can offer control and protection, it must be done with precision. If the trust does not qualify as a see-through trust, the account could lose the 10-year distribution window and be subject to the 5-year rule, resulting in faster taxation.
Additionally, distributions retained inside the trust will be taxed at compressed trust income tax rates, which reach the top bracket at much lower income levels than individual rates. Even properly drafted see-through trusts can introduce administrative complexity and legal expense for the trustee.
If the trust contains broad or ambiguous language, or includes non-individual beneficiaries such as charities, it could jeopardize favorable tax treatment. Careful drafting and coordination with your estate planning attorney are essential to avoid these pitfalls.
When Naming a Trust Makes Sense
There are times when naming a trust as the beneficiary is necessary and beneficial. These include:
Minors: A minor cannot legally manage inherited assets. Naming a trust allows a trustee to manage the funds until the child reaches an age you determine is appropriate.
Special Needs: A special needs trust can be structured to allow a disabled beneficiary to receive IRA benefits without losing government assistance.
Spendthrift Concerns: If a beneficiary is financially irresponsible, a trust can provide structure and control over how and when funds are accessed.
In each of these scenarios, the trust must be drafted with great care to preserve favorable tax treatment and avoid unintended consequences.
Why an Experienced Estate Planning Attorney Is Essential
While beneficiary forms may seem simple, the legal and tax implications behind retirement account inheritance are complex. That’s why working with an estate planning attorney is so important.
An experienced attorney will:
Ensure your retirement account designations coordinate with your trust, will, and broader goals.
Draft see-through trusts when necessary to preserve tax advantages.
Help you avoid common pitfalls, such as leaving accounts to your estate or improperly naming a trust.
Guide you on the best strategies for minimizing taxes and protecting beneficiaries.
Retirement account rules continue to evolve. With laws like the SECURE Act and future tax legislation likely to bring changes, your plan must be flexible and well-informed.
Conclusion
Including an IRA or 401(k) in your estate plan isn’t about transferring ownership now — it’s about ensuring the account is passed on in the most efficient, tax-smart, and legally sound way. For many, naming individual beneficiaries directly is sufficient. But for others, using a trust can offer protection and control, as long as it’s done correctly.
The best approach depends on your unique family situation and financial goals. By working with an estate planning attorney, you can feel confident that your retirement savings will provide for your loved ones in the way you intend, without unnecessary taxes or delays.
If you haven’t reviewed your beneficiary designations recently or need help aligning them with your estate plan, now is the time to act. A thoughtful, integrated plan today can save your family significant time, money, and stress in the future.
Need help with Incapacity Planning, Estate Planning, Trust Administration, Probate, or Business Law? Devey Law is here for you. Call us at 805.720.3411 or email info@deveylaw.com to schedule a consultation.
This blog is for informational purposes only and does not constitute legal advice. Reading this blog does not create an attorney-client relationship between you and Devey Law, A Professional Law Corporation. Laws and regulations may change, and the information provided may not reflect the most current legal developments.
