Can a participant name a trust as his beneficiary?

[Cathy from Chicago]

Can a participant name a trust as his beneficiary? If not, why? If so, why isn't it done more frequently? thank you.

[Guest Steve C.]

Yes. The requirements for naming a trust as the designated beneficiary are found at Regs. 1.409(a)(9)-4 Q&A's 5 and 6. Naming a trust as a designated beneficiary of qualified plan or IRA benefits is done frequently by estate planners.

[Cathy from Chicago]

Thanks, Steve, for your prompt answer!

[Guest PAUL DUGAN]

I agree with Steve that it is legal and that estate planners do suggest this in a number of cases. However because of the income taxes, it can create many problems with a married participant. One of my plans was involved in a real nasty law suit when the insurance agent took a death bed benificiary change from spouse to trust. The change was to save possible future estate taxes but resulted in 350,000 of income taxes now.

[Mary Kay Foss]

A trust is often a better beneficiary for an IRA than a qualified plan. Most qualified plans with a nonspouse beneficiary pay out the benefits in a lump sum all in one or two years. This causes the income tax problem referred to above.

If the benefits are rolled into an IRA, a trust beneficiary can manage the income taxes. This is because a qualified trust beneficiary can take distributions over the life expectancy of the oldest trust beneficiary.