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.
May Want to Think Twice Before Naming your Trust as the Beneficiary of the Solo 401k
However, unless it is important to you to limit the access of the solo 401k funds by the beneficiaries because they are young, have special needs or you don’t consider them responsible it may not be best to name a trust as the beneficiary of the solo 401k. Reason being, if your surviving spouse inherits the solo 401k funds through a trust, she will be forced to liquidate the solo 401k funds over 10 years if the solo 401k account holder died after age 73 or by the 10th year if the solo 401k account holder died prior to reaching age 73. Visit here to learn more about this rule. On the other hand, if your spouse is the named beneficiary of the solo 401k instead of naming your trust as the beneficiary, she will have the option to direclty rollover the inherited solo 401k her own IRA. Not so if inherited through a trust.
SECURE Act
Resulting from the passage of the SECURE Act, which became effective on January 1, 20220, inherited solo 401k funds must be distributed over a 10-year period, unless the beneficiary of the solo 401k is your spouse.
For more information regarding the impact of the SECURE Act on inherited solo 401k funds, see the following:
- https://www.mysolo401k.net/trust-as-beneficiary-of-the-solo-401k-where-the-trust-names-the-surviving-spouse-of-the-solo-401k-participant-as-primary-beneficiary-of-the-trust/
- https://www.mysolo401k.net/the-10-year-beneficiary-solo-401k-ira-distribution-rule-pursuant-to-the-secure-act/
- https://www.mysolo401k.net/what-is-an-eligible-designated-beneficiary-edb-and-a-non-eligible-designated-beneficiary-found-in-the-secure-act-for-solo-401k-beneficiary-distribution-purposes/
- https://www.mysolo401k.net/solo-401k-spouse-beneficiary-rules-under-secure-act/
Qualifications for Naming the Trust as the Beneficiary of the Solo 401k
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.
