Short answer: Maybe, but it depends.
Long answer: there are specific rules that must be followed in order to have a trust be a beneficiary of a qualified retirement plan. 401k’s and 403b’s cannot have a non-human beneficiary, but IRA’s can. However, the trust must meet the following four requirements:
1. The trust must be valid under state law;
2. The trust must be irrevocable (or become irrevocable at the death of the plan participant);
3. The trust beneficiaries and their ages must be identifiable; and
4. The trust documentation must be provided to the plan administrator by October 31 of the year following the participant’s death.
This type of trust is call a “See Through Trust”. There are pros and cons to using a trust as a beneficiary of your IRA.
Pros – a trust is best used in the scenario where the potential beneficiaries of the IRA are minor children. Federal law does not allow minors to inherit such benefits outright until they reach the age of majority. The funds received from the IRA would ultimately need to be held in trust anyway. If used appropriately, the trust could be used to stretch out the IRA distributions over the life of the beneficiary, rather than being subject to the 5 Year Rule (requiring the entire plan balance to be distributed within 5 years of the death of the plan participant). If the STT is a “Conduit Trust” – meaning it acts as a pass through tax entity and the income is attributed to the beneficiary for tax purposes – you could still achieve favorable tax treatment even with the trust.
Cons – Trusts are taxed at a higher rate than most people realize. The top income tax rate on trusts for 2016 is around 40% (which is the same as the top tax rate for the federal estate and gift tax). If the trustee elects to take a lump sum distribution in the first year, the whole distribution would be taxed at 40%, meaning you basically just had the estate tax applied to your retirement account, except it’s going to have to be paid by your beneficiaries rather than your estate. Naming individual beneficiaries of your IRA allows them to take income distributions at their individual income tax rate, which is likely much lower than 40%. Additionally, if the STT is an “Accumulation Trust” – meaning it receives the IRA required minimum distributions (“RMDs”) and holds them before disbursing income to the beneficiaries – the RMD income will be taxed at the trust level instead and subject to much less favorable tax treatment.
Ultimately, IRA trust planning is complex and requires a case-by-case analysis of each family’s financial situation and desires. Do not take this sort of planning lightly.