Skip to main content
Nov17, 2022

Trusts as a Beneficiary

Where to listen

In this episode of the Great Retirement Debate, Ed and Jeffrey debate naming a trust as a beneficiary.

Episode Transcript

[00:00:00] INTRO: Hi, I’m Ed Slott and I’m Jeff Levine. And we’re two guys who just love to talk about retirement and taxes. Look, our mission is simple to educate you the saver so that you can make better decisions because better decisions on the whole lead to better outcomes. And here’s how we’re going to do that each week.

[00:00:16] INTRO: Jeff and I will debate the pros and the cons of a particular retirement strategy or topic with the goal of helping you keep more of your hard earned money. Yeah, but we won’t know which side of the debate we’re taking until we flip a. Winner of the coin flip gets to pick which side of the debate they want to argue.

[00:00:33] INTRO: And both of us will have to argue in favor of our respective positions, whether we agree with them or not. At the end of each debate, there’s going to be one clear winner. You a more informed saver who can hopefully apply the merits of each side of the debate to your own personal situation, to decide what’s best for you and your family.

[00:00:52] INTRO: So here we go. Welcome to the great retirement debate.[00:01:00]

[00:01:02] Jeff Levine: All right. Welcome back to our latest episode of the retirement debate. Ed. Good to be back

[00:01:07] Ed Slott: The great retirement debate. I thought it was

[00:01:09] Jeff Levine: What’d I say? What’d I say?

[00:01:11] Ed Slott: You just said it was a retirement debate. No, it’s a great one.

[00:01:14] Jeff Levine: That’s all right. Maybe this week is gonna be the excellent one. That’s a, you know, it’s, it’s probably a good idea. We’re we’re still relatively new to this podcasting thing, ed, but probably a good idea to know the name of your own show, right? That’s a that’s that’s usually a good start. All right. Well, uh, ed, what’s on, what’s on the docket for today. What do we got?

[00:01:32] Ed Slott: Well, some questions are surround whether a person should name a trust as their IRA or planned beneficiary and as with everything there’s reasons for or against.

[00:01:44] Jeff Levine: All right. All right. That’s a good one. That’s a good one. I definitely get that question a lot. I’m sure you do.

[00:01:48] Ed Slott: Oh yeah.

[00:01:49] Jeff Levine: Quite a bit as well. Alright, so your topic this week, so I get to flip the coin alright. I’m gonna take tails and, uh, let’s see what it comes up as. We’re flipping the coin here. We’re actually [00:02:00] gonna use Google coin flip for this.

[00:02:01] Ed Slott: I didn’t even know there was such a thing. Can we trust it? Cause we’re talking about trust. You get it?

[00:02:07] Jeff Levine: Ah, you got they very good. Oh boy. All right. This is gonna be a lot of bad jokes between the two of us. I can see that already. We’re gonna get groans, audible groans coming through the speakers. All right.

[00:02:17] Jeff Levine: So good news for you, ed. Uh, heads is the answer. So you get to pick. Do you wanna argue this?

[00:02:22] Ed Slott: Don’t people get to see the Google thing? Like how do we know? You’re just watching that.

[00:02:26] Jeff Levine: Well, I told you you won. All right. Fine. I won. There you go.

[00:02:29] Ed Slott: All right.

[00:02:30] Ed Slott: No, I thought we would see the whole coin turning thing and everything.

[00:02:33] Jeff Levine: All right. So, well, no, one’s gonna see stuff, ed. Remember, this is a podcast.

[00:02:36] Ed Slott: Oh, right, right. It’s. Podcast. Right. I can think. Yeah. Cuz we’re on video now. All right. all right, so you, it should

[00:02:42] Jeff Levine: Hold on. Wait, I wanna just make a note to our producer. Ed. Don’t cut this part. Please leave this in.

[00:02:47] Ed Slott: All right. Wait, then you gotta have a noise. All right. So I’m gonna make a noise.

[00:02:51] Jeff Levine: All right. There’s the coin flip noise. Very good. I don’t know if that came through on audio, but ed, you win. Great. You get to argue which side you want, which, uh, which, which one you going [00:03:00] with?

[00:03:00] Ed Slott: I would say not to name a trust. I would go on that side. Although there are arguments on both sides.

[00:03:05] Jeff Levine: Well, I’m gonna do that part, ed. Hold on. I’m gonna do that part. All right. So you’re gonna argue in favor of not using a trust. Yes?

[00:03:15] Ed Slott: I would argue not in favor of a trust. You said in favor of not using a trust. Right? I would argue against.

[00:03:23] Jeff Levine: Okay, perfect. So I’m gonna argue, I’m gonna argue pro I’m gonna say you should use a trust in most instances to leave your IRA or other retirement vehicle to a trust. All right. You wanna, you wanna, it’s your topic. You go first. Let kick us off. What, why, why, what what’s what’s what’s your argument against trust? Ed? Why? Why? I mean trust?

[00:03:41] Ed Slott: Well, there are reasons for it, but the secure act made it a lot less valuable before the secure act people had stretch IRAs, they could do it through, what’s known as a conduit trust where you could get both the protection of keeping the funds in the trust with just small distributions going out to the [00:04:00] trust beneficiaries. That’s not the case anymore. In almost all the cases. Non-spouse beneficiaries. There are exceptions of course, with everything, but most non-spouse beneficiaries will have to empty that account. Or if it’s left to the trust, will have to be paid into the trust by the end of the 10th year after death under these new 10 year rules. And if you want. Credit or, or the credit or a trust protection or protection for the, uh, beneficiaries or from the beneficiaries, it would have to remain in the trust and get taxed in the trust at high trust tax rates, trust tax rates, not that they’re high, but the brackets are very compressed after about 13,000. You’re at the top, right? Where an individual wouldn’t hit that rate till over 500,000. So. What’s the cost of protection. It may be prohibitive. So I don’t think most people need that kind of, uh, heavy duty lifting of a trust, uh, given the cost and the complexities.

[00:05:01] Jeff Levine: [00:05:00] All fair points, but I, I would ask you this, what’s the one thing we know about the future.

[00:05:09] Ed Slott: That we don’t know

[00:05:10] Jeff Levine: That’s exactly right. We don’t know what the future is. And so if we don’t know what the future is, I mean, what if there’s a, a car accident or what if there’s a, a, a divorce or what if there are any number of issues that we can’t foresee? If there’s one thing we know about the future, it’s, it’s unknown and you are right. Like things happen all the time. You talked about law changes, but I mean, I, I think. A decade ago, ed, think about all the things that have already happened since then, that you could have never predicted would be the case at this point in time. Right? I mean, who could have seen all the things happening over the last, I mean, in my own lifetime, over the last decade I got. Married. I had three kids. I moved halfway across the country. I mean, so many things happen. And if we can’t foresee that, well, then the only reasonable [00:06:00] approach might be to use a trust to make sure that no matter what happens in the future, that I have protection, you talked about taxes, but if I lose $1 of my IRA to a creditor, I have $0. If I lose 40 cents of my IRA to a trust tax rate. Like, no, I don’t want that, but at least I have 60 cents left.

[00:06:23] Ed Slott: Yeah. The only reason you would use a trust, uh, what I’m saying, I, it’s not so much in the past. People used it for both tax reasons and non-tax reasons. I don’t think there’s a tax reason anymore because you don’t get the long deferral. You don’t get the stretch IRA for the most part. The only time I would use a trust, if you, it would be for personal non-tax reasons. Like some of the things you said, you have a minor. An unsophisticated beneficiary. Some of those things are divorced. Credit of bankruptcy, lawsuits. Every client I ever had, especially with young kids has told me. You know [00:07:00] what I don’t mind giving to my kids. The one, the thing that bothers me is the ones they marry. That’s what they always say because they built up 3 million in an IRA and they say, but I don’t want it to end up with somebody I don’t even know now. So that may be a reason to name a trust, but I think it’s overly cumbersome for most people. And you can use better vehicles. For example, if somebody said, I’m not sure if my kid’s gonna be on drugs. Uh, problems or be, uh, full prey to people, uh, taking advantage of them with money issues. Then I would say if that money is earmarked for your children or grandchildren, maybe take it down at today’s low rates and put it in a life insurance policy and leave that life insurance to the trust we have total flexibility. You get the post death control, you get the protection and low tax rates.

[00:07:49] Jeff Levine: Yeah, but what if it’s not earmarked? What if I I’m one of the, the majority of Americans out there who say, you know what, I’ve gotta worry about my retirement first and if my kids get anything left, [00:08:00] that’s fantastic. Well, I can’t spend all that money on life insurance today and go broke so I have no money left in my lifetime. I mean, that’s a great problem to have don’t get me wrong, where I’m trying to, to leave a, a giant legacy to my kids and, and God willing. Everyone of everyone listening today has that particular problem. But as we know, the, the majority issue today is I don’t wanna run out of money before I run out of life. And if I spend all my money on life insurance, I’m gonna run out of money before I run out of life with a lot greater frequency. So I think we’ve gotta look at a, a situation where. You have a, a vehicle that if you end up with money and look, hopefully that’s the case. If you do there’s protection, but if not, you are able to spend those dollars freely in retirement. I mean, whether it’s long term care needs or, I mean, we just, again, the future is unknown and putting those dollars into life insurance means they’re probably a lot less likely to be used today for you.

[00:08:56] Ed Slott: Well, it could be used today. For example, life insurance could have long term [00:09:00] care riders where you can pull out the cash value tax free. But if you’re really worried about that, then you don’t have as big an issue. I think the trust would only be for very large IRAs where more of that money. Will be passed to the next generation and won’t be consumed during your lifetime. I would even put a dollar amount on it, but everybody’s situation is different. I would say if you don’t have a million dollars in an IRA, you probably, you know, uh, I would only consider a trust to say a million or more in an IRA. And every situation is different. Some people might say, that’s not enough. I may need the whole million. So every situation is different and I agree you have to take care of yourself first, but if you’re really worried about post death control, uh, you may want to lock some of it up in a trust, but I think there’s better vehicles, IRAs were always lousy assets to leave to our trust with all the complexities and the hurdles and the obstacles and the tax rules and the RMDs and now the new IRS rules, making it even more [00:10:00] complicated. Most of the trusts are not even done correctly. The average attorney uses these garden variety, boiler plate trusts, and they cause more problems and they’re worth. And generally what I find is when people do have trust, even if they’re done perfectly after say the husband dies, the wife says, well, I don’t want that. I wanna just do a spousal rollover and get to my money. So I, I think it’s a personal decision, like any big financial decision, but I think it’s overly complex and taxing to leave an IRA to a trust today.

[00:10:29] Jeff Levine: I, I caught that by the way, overly complex. And, and what Ed?

[00:10:32] Ed Slott: Taxing

[00:10:33] Jeff Levine: Ah, yes. That’s the second dad joke for today. All right. You’re on fire with those look, I, I think you make great points all around, but, but if I’m John or Mary Smith and I’ve worked my entire life and, and, and scrape by, and, and I’ve accumulated, let’s say it’s 500,000, as you said, I put, put a million dollar number on it. I understand that, you know, there are some cost and complexities that come along with trust. But if I have spent my entire life working to build up this half a [00:11:00] million dollar retirement account, that’s everything to me, it, it represents my whole lifes work and the last thing I want is if something happens to me, for my kids to squander it or for a lawsuit to occur because of maybe something outside of their control.

[00:11:14] Jeff Levine: I mean, we live in a litigious society today, uh, where you can’t forsee…

[00:11:17] Ed Slott: Really?! I never saw a sign. Uh, you know, I travel around the country and I never see any signs for attorneys looking for lawsuits.

[00:11:26] Jeff Levine: You’re actually going to be sued now for, for, for liable on that. That’s an untrue statement, ed. And we’re going to,

[00:11:31] Ed Slott: I don’t know if you notice this, you travel around too. Every city, the giant signs, personal injury. I get your money.

[00:11:38] Jeff Levine: Yes. Yeah. Well every yes, everywhere. Yeah. It’s uh, Yeah, that, um, well we live in a litigious society. All right. So we, we agree on something. We can agree on that today. So we agree on that.

[00:11:48] Ed Slott: It all comes down to how much you think you need today, versus how much you’re going to leave over for the next generation. If you think a big chunk of it is going to be left over and you won’t need it, I still don’t think you [00:12:00] need a trust. You’re probably better off with the life insurance solution. It’s the most flexible asset to leave to a trust cuz you don’t have all these IRA trust complications. Plus no tax.

[00:12:10] Jeff Levine: Well, I guess, I guess in some sense you win then because you don’t have an IRA. And so if you don’t have an IRA, you can’t leave it to a trust, but I don’t know. That’s really in the spirit of the rule, ed. I mean, you’re, you’re saying like, let’s just get rid of the thing altogether. I mean, what, what,

[00:12:26] Ed Slott: No, I’m saying if, if you wanna leave your IRA to a trust because you want the protection, you can get the protection using other vehicles besides the IRA.

[00:12:36] Jeff Levine: All right. All right. I’ll I’ll allow it. all right. I’ll allow the argument. Where’s my, where’s my gavel? I gotta get my gavel out. At the end of the day, I, I just think that the biggest issue is, uh, we, we have so many unknowns going forward and because of that, You can have a, and you talk about trust tax rates, but what if I give my trustee the authority? Right? Like [00:13:00] trust tax rates are only an issue. Ed. If I, as you know, if I hold the assets within the trust at the end of the year, that they’re distributed.

[00:13:08] Ed Slott: Right. But that’s exactly what you’re going to do. If you wanna protect it from those kids blowing the money.

[00:13:13] Jeff Levine: Yeah, but what if I, well, but at least I have choice at that point, right? You talk about 10 years.

[00:13:17] Ed Slott: No, they’ll be dead. So the trustee will have a choice.

[00:13:20] Jeff Levine: That’s a, well, yes, that’s a good point, but all right. So the trustee will at least have the choice 10 years from again. I told you all the things that happened in my life 10 years from now, uh, that trustee could make the decision as to whether or not they wanna keep those assets in the trust or pass them out. And at least at that point I would, I would have 10 more years of visibility into, I mean, if I could predict what would happen in 10 years from now, it, uh, I gotta tell you, I like you, but I wouldn’t be doing this podcast with you.

[00:13:48] Ed Slott: You don’t know that for sure. Maybe something else you’d be beaming it to another planet or something.

[00:13:52] Jeff Levine: That’s right. Yes.

[00:13:53] Ed Slott: But going back to the trustee thing, there’s another reason I don’t like trusts who will be the trustee. Most [00:14:00] people just arbitrarily name. Family member as trustee not realizing they have personal liability. They have to know all of these rules to paying IRAs to a trust. Most professionals don’t know that, and most trustees are going to be unprepared for the task.

[00:14:17] Jeff Levine: Well, that’s true, but I would just argue, we need to do our research and find the right sort of professional to work with. And, and perhaps that that’s where we have to leave it for today. So, so help me, help me summarize, right. If, if, if I’m listening here and I’m going through this debate myself, and I’m trying to figure out whether I should be using a trust or not, what are some of the key things on both sides of the issue that I need to to think about?

[00:14:38] Ed Slott: Well, first, if you are going. Feel that you’re going to consume most of your IRA. And I just put an arbitrary number on a million or less, probably not that, not that much need for a trust cause between RMDs and your spending, most of that will be consumed during your lifetime. The big issue is how much of your IRA or plan 401k you’re going to [00:15:00] be leaving to the next generation. Those are the funds you’re worried about. If it’s going to be a large share, you may wanna consider a trust, or better vehicles like life insurance, pulling that IRA down at today’s low rates and have a more customized plan. You really don’t get a customized plan with an IRA trust, cuz you gotta go through all those tax landmines and loophole, uh, not loopholes , uh, tax landmines and obstacles and play by all the rules.

[00:15:27] Ed Slott: The life insurance may be a better situation. So it comes down to two things, how much you’re going to leave over to the next generation and how much protection and control you want from the grave, rolling from the grave to protect the IRA that you worked hard for. As you said, Jeff, that you worked hard for for 20, 30, 40 years. Cause if you didn’t, you wouldn’t have anything to worry about to protect it for your beneficiaries and from your beneficiaries. That may be a reason to use a trust.

[00:15:58] Jeff Levine: All right. At least that we can agree [00:16:00] on. Look, there are two sides to every coin ed, as we know, but your life is too important to leave up to a coin flip. And that’s why these types of issues have to be worked out. One thing we always agree on ed is that you’ve gotta work with a knowledgeable professional to help you sort through the pros and cons of any decision. And we encourage all of our listeners to do that. If you’d like to continue to discussion with ed and I make sure you reach out to us. You can contact us on social media, reach out to us on Twitter @TheSlottReport for Ed that’s @TheSlottReport, and @CPAPlanner for myself, let us know what you thought. Let us know if you’ve got additional pros and cons that we missed. And of course, if you’ve got a topic for a future episode that you’d like Ed at night to debate, let us know until then Ed it’s been fun. And I look forward to debating you again next week.

[00:16:42] Jeff Levine: All right.