Should You Name Your Trust as the Beneficiary of Your IRA, 401k or Other Qualified Retirement Plan?
A common estate planning question I receive is whether to list a trust as the beneficiary of a retirement account. It’s a smart question, especially if your goal is to protect your loved ones from creditors, taxes, or even their own bad decisions.
In many cases, naming your living revocable or testamentary trust as the beneficiary — instead of your children or spouse directly — is a more protective strategy. But the real decision lies in how that trust is designed: as a conduit trust or an accumulation trust. Each has very different consequences, and what’s best for you depends on your goals.
As always, I’m happy to connect and walk you through building the right type of trust for you.
The Supreme Court Changed the Game
In 2014, the U.S. Supreme Court ruled in Clark v. Rameker that inherited IRAs are not protected from creditors. That means if your adult child inherits your IRA directly and later gets sued, goes through a divorce, or faces bankruptcy, those assets are fair game.
By naming a trust as the beneficiary instead of an individual, we can add a layer of protection — as long as the trust is properly structured.
Conduit Trusts: Simple, But Limited
A conduit trust is a straightforward option. It receives the required minimum distributions (RMDs) from your IRA and passes them on to the beneficiary each year. Think of the trust as a pipe: money comes in and goes out right away.
Conduit trusts are often chosen for their simplicity. There’s no added tax burden to the trust, and things stay clean and predictable. But there’s a major downside: those required distributions are not protected. If your beneficiary is in the middle of a lawsuit, divorce, or financial crisis, that money can be taken.
Accumulation Trusts: More Protection, More Control
On the other hand, an accumulation trust gives the trustee discretion to retain distributions rather than pass them on immediately. This offers far greater control and protection.
Yes, income retained by the trust can be taxed at a higher rate than if it were distributed. But sometimes, that tax hit is well worth the peace of mind. Suppose your beneficiary is dealing with legal issues such as divorce, substance abuse, or simply not ready to manage a large sum of money. In that case, an accumulation trust can shield the funds from being misused or lost.
Consider this example: A beneficiary receives a $50,000 inheritance and decides to buy a new car. To do that, they might need to withdraw over $70,000 just to cover taxes. That’s a quick way to turn a $70,000 asset into something worth $40,000 the moment it leaves the lot.
An accumulation trust prevents that kind of one-time spending mistake. It doesn’t just protect assets for your beneficiaries — it protects assets from them when needed.
The Best of Both Worlds?
The real beauty of an accumulation trust is flexibility. If everything’s stable, the trustee can choose to distribute funds just like a conduit trust. But if life throws a curveball, the trust can retain the assets and protect them.
What’s the Right Answer for You?
If your goal is simplicity and you’re confident your beneficiaries are financially responsible, a conduit trust might be fine. But if you’re concerned about lawsuits, poor spending habits, or future unknowns, an accumulation trust might offer the kind of protection you’re really looking for.
Like most things in estate planning, the “right” choice depends entirely on your situation. But the most important thing is that you have a plan in place — one that’s built with intention, not just convenience.
Let’s Talk About Your Plan
Whether you're naming beneficiaries on an IRA, or creating your first trust, I help Colorado families build plans that truly protect what matters most.
Reach out today to discuss which approach is right for your family.