Naming trust as beneficiary of Solo 401k Plan

 

Why would a solo 401k owner name a trust as a beneficiary?

There are a number of reasons why the solo 401k owner would want to name a trust as the beneficiary of his or her solo 401k plan.  For example, to preserve the solo 401k assets, avoiding estate taxes, protecting assets for minors or a special needs child.  A popular reason is  to limit the beneficiary’s control over the trust assets. This is specially the case when the solo 401k plan’s value is significant and the solo 401k owner’s spouse or young children have no expertise (or interest) in financial matters or when a solo 401k owner has concerns that a beneficiary lacks the judgment in making good spending decisions. Moreover, a trust can dictate how assets will be invested or can require that beneficiaries meet certain requirements before they can receive assets.

Before naming your trust as the solo 401k primary beneficiary, make sure the trust qualifies.

To qualify as what the IRS refers to as a “look-through” or “see-through” trust for Solo 401k distribution purposes, the trust must meet the following requirements outlined in Regulation Section 1.401(a)(9)-4, A-5:

1.   The trust is valid under state law or would be but for the fact that there is no corpus.

2.   The trust is irrevocable or the trust contains language to the effect it becomes irrevocable upon the death of the solo 401k participant.

3.   The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in solo 401k owner’s benefit are identifiable.

4.   The required trust documentation has been provided by the trustee of the trust to the plan administrator no later than October 31st of the year following the year of the solo 401k owner’s death.

Planning Tip

In addition to these requirements, all applicable trust beneficiaries must be individuals or the stretch option may be lost. There is no separate account rule for trusts, so while the trust can stretch distributions over the life of its oldest applicable beneficiary, the IRS will not let multiple beneficiaries be treated separately for required distribution purposes. Thus, if an applicable trust beneficiary is a charity or other entity without a life expectancy, the stretch for all trust beneficiaries may be lost.

More Information

  • Per the Retirement Equity Act of 1984 (REA), spousal consent is required if the solo 401k owner wants to name a beneficiary of his or her retirement plan to someone other than his or her spouse. This same rules also applies when naming   a trust as the beneficiary of the solo 401k plan.
  • If a trust qualifies as a “look-through” or “see-through” trust, then the trust can be treated as a designated beneficiary and can stretch distributions over the oldest applicable trust beneficiary’s life expectancy.
  • It is referred to as a “look through” trust because you ignore the fact that the trust is the named beneficiary when determining the distribution period over which RMDs must be taken, and instead, look through the trust to the ages of the named beneficiaries of the trust.
  • There is no separate account rule for trusts, so if an applicable trust beneficiary is a charity or other entity without a life expectancy, the stretch for all trust beneficiaries is lost.
  • If a see-through trust is drafted as a conduit trust, only the income beneficiaries’ life expectancies need to be considered when determining the life expectancy to use to calculate required minimum distributions (RMDs).
  • If a trust is drafted as a discretionary trust, the ages of both the income and remainder trust beneficiaries must be considered when determining the life expectancy to use to calculate RMDs.
  • Determining whether a trust beneficiary must be taken into account for purposes of determining RMD payments is complicated. The decision as to who is in and who is out can seem daunting; therefore, make sure to work with your attorney before having your solo 401k provider process a death claim.

 

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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