On the blog last month, we broke down why it’s important to be careful designating a trust as the beneficiary of a retirement account. There are numerous financial factors at play that make such a move unfeasible in most circumstances. But, as with most things, there are exceptions to be aware of.
At Dahl Law Group, we take great care in equipping our clients in Northern and Southern California with the best possible resources to navigate these rare but crucial financial and estate decisions. Today, we want to explore the rare circumstances under which it may be prudent to designate your trust as the beneficiary of a retirement account.
Contingent Trust for Minor Children
Designating your minor children as the direct beneficiaries of a retirement account not only has practical challenges but also creates unnecessary risk for minors who are not able to acquire or properly manage these assets responsibly. In cases where you do want to have them be the direct beneficiary, it makes more sense to have your spouse as the primary beneficiary with your Trust as the contingent beneficiary should your spouse predecease you.
Designating the Trust as a contingent beneficiary ensures that the assets are distributed based on specific conditions, such as reaching a certain age or achieving educational and skillful milestones. This is beneficial instead of younger children mismanaging assets after you pass away. Furthermore, if minor children are designated as individuals beneficiaries of your retirement accounts, then a guardianship court proceeding will be needed to manage those funds. While designating a trust as the beneficiary of a California retirement account may result in higher taxes, the cost is generally going to be less than having to establish a guardianship for your minor children to properly manage the funds or your children wasting those funds.
Caring for a Loved One with Disabilities
For families caring for a loved one with disabilities, a trust can be the right strategic choice for managing and distributing retirement funds, as well. This ensures that the funds are used to provide continuous care and support tailored to the specific needs of the disabled beneficiary while also, again, avoiding the excess cost and burden of establishing a conservatorship (a court proceeding similar to a guardianship).
Establishing a trust in this case allows for professional oversight of the funds, ensuring that they are used precisely for the intended purpose of supporting the loved one’s well-being and care. Furthermore, designating an individual who receives needs-based government benefits as an individual beneficiary of a retirement account will cause them to lose their benefits! Instead, your Trust can have special needs provisions to allow use of the retirement funds, while preserving the retirement funds for their use.
Sound Tax Strategies and Estate Planning for California Families and Business Owners
At Dahl Law Group, we serve families and business owners across Northern and Southern California, aiming to assist them in making sound financial decisions regarding their retirement savings. We want to help you make decisions that prioritize a prolonged financial legacy and the success of even your loftiest retirement goals. It’s crucial to structure these retirement accounts and trusts properly to optimize financial benefits and tax efficiencies. For guidance tailored to your specific circumstances, contact Dahl Law Group’s offices in Sacramento or San Diego.
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