Can a Trust Be a Beneficiary of a 401(k) Plan?

There are certain caveats to designating your 401(k) to a trust beneficiary:

• The assets will be subject to Required Minimum Distributions: The primary disadvantage of naming a trust is that the retirement plan assets will be immediately subjected to RMD payouts, calculated based on the expected lifespan of the oldest beneficiary. When there are multiple beneficiaries, the younger ones will then lose out on their ability to earn deferred interest.
• Uncle Sam may want his cut straight away: Employers can prohibit trusts from receiving periodic 401(k) payouts, meaning all the deferred taxes will be due on the full 401(k) balance within one year of your death, when the money is inherited. If your employer’s plan does not permit life-expectancy payouts to a trust beneficiary, you may consider rolling over the 401(k) balance into an IRA that specifically allows it.
• You must leave your money to a person: The IRS has rules about trust beneficiaries. For instance, the 401(k) must go to a person or group of people. You can’t, for instance, leave your assets to a charity, your church, or any other non-specific entity. You may also need to designate a contingent secondary beneficiary who will receive the remaining assets should the primary beneficiary die before all funds have been distributed.
• Trust setups require a bit of paperwork: Valid trust beneficiaries must qualify under state laws. They must be named specifically in the trust document, and a copy of this document must be filed with the 401(k) plan administrator. Under IRS rules, a will cannot override a beneficiary designation form, so you will want to be sure of your wishes.