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Distributing Your Assets

In writing their wills, most people want to include financial support and gifts to those they love, either in the form of inheritances, gifts or trust funds. However, sometimes, the best way to distribute the financial success you have enjoyed throughout your life is to designate a trust as your beneficiary and have the proceeds handled from there.

Under the minimum distribution rules for retirement plans such as 401(k) accounts, assets are typically distributed according to the life expectancy of your plan’s beneficiary. Although it is generally a rule that an individual should be your designated beneficiary, there are cases where you may name a trust, and the beneficiary of the trust itself will be considered the designated beneficiary of your funds.

If you do not have a beneficiary named in your plan, the assets will have to be distributed more quickly and your estate will lose the tax-deferred growth benefits that make these types of retirement plans so valuable.

What Happens When You Name a Trust as Your Beneficiary?

When you name a trust as the beneficiary of your retirement plan, you have to follow the rules and guidelines set forth by the Internal Revenue Service (IRS):

  1. The trust must be valid under state laws.
  2. The trust must be irrevocable, or must become irrevocable upon your death, according to its terms.
  3. The beneficiaries of the trust must be identifiable from the trust instrument.
  4. The trust documentation must be provided to your retirement plan administrator.
  5. All of the beneficiaries of the trust must be individuals.

Although these rules may seem daunting, they are mainly focused on having the right beneficiaries named so that your assets are distributed to the people you want to receive them.

The beneficiaries of the trust must be individuals because otherwise, the distribution rate of your assets will be affected. If your retirement assets go to an estate, without a designated individual as beneficiary, the assets must be distributed within five years of your death. In order to ensure that this distribution is spread out over the course of your beneficiary’s life, you must name an individual under IRS laws.

Additionally, you can name more than one beneficiary of your trust, and these beneficiaries will be treated as “identifiable” so long as the trust has the oldest beneficiary clearly labeled. In distributing your assets, the IRS will use the oldest beneficiary’s life expectancy as a benchmark to determine the period of distribution.

Estate planning is a hard thing to do, especially because there are so many “unexpecteds”— you don’t know when you will pass or who in your family will be there when you do. Accounting for a wide variety of circumstances may be best done through the establishment of trusts and beneficiaries, and this is one great option to ensure that your funds will be allocated as you wish.

To discuss your financial future and security, contact a San Mateo County financial elder abuse attorney today. The legal team at the Evans Law Firm, Inc. helps clients establish secure financial plans for their futures. Contact us for a consultation today at 415-441-8669 or online at www.evanslaw.com.

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