Should retirement accounts be titled into a trust?

Ross Keilen Estate and Trust Litigation

Short Answer: Generally, no.

One of the main advantages to executing a living trust is that it allows assets to be titled in the trust, avoiding the time and expense of probate. Probate is the process of administering an estate through the court system, which can expend significant time and resources. However, certain assets avoid probate without being titled into a trust, including assets with designated beneficiary forms, such as annuities, life insurance, and certain retirement accounts. Therefore, there is generally no need to title these accounts into a trust.

Negative tax implications may also arise. Inherited property is generally not considered gross income and is therefore not subject to income tax. IRC § 102(a). However, retirement accounts are an exception. When ownership is transferred on an IRA or 401k account into a trust, the Internal Revenue Service considers the transfer a distribution, which deems the assets taxable. Therefore, you will be required to report the full value of the account on your tax return for the year you transferred the ownership. Julie Garber, Should You Fund Your IRA or 401(k) into Your Revocable Trust? The Balance (2017). Additionally, penalty taxes may apply for early distributions of the funds depending on your age. IRA FAQs – Distributions (Withdrawals), IRS (2017).

Take Away: As retirement accounts generally avoid probate without titling them into a trust, and possible negative tax implications apply, it is generally not recommended that you title retirement accounts into a trust. 

Ultimately, it is best to talk with an estate planning lawyer and certified public accountant who can help you explore your estate planning and tax options.