How Trusts Can Benefit You and Your Family


Gregory S. DuPont, JD, CFP May 16, 2023

Your retirement account may be one of the most valuable things you own. Many people choose to name their children as the beneficiaries of these accounts. They think it is a way to easily transfer their wealth if something happens to them.

But, that assumption is only partially true. Some factors make this type of transfer more complicated than you might think, especially if your child is a minor.

Can a Minor Be Named Sole Beneficiary of a Retirement Account?

Yes, you can name your minor child as the primary or contingent beneficiary of your retirement account. Contingent beneficiaries only receive the monies in the account if the primary beneficiary passes away before you do. But, if your child is a minor when you die, a court may have to appoint a guardian to handle any money distributed to them from the account. This will take time and resources, and the appointed guardian may not be the person you would have chosen. You can avoid this by proactively naming a guardian for your minor child in your will.

Do Inherited Retirement Accounts Have RMDs?

Under the SECURE Act, most beneficiaries must receive the entire retirement account within ten years of the owner’s death. But, minor children of an account owner fall into a special category of beneficiaries (called eligible designated beneficiaries or EDBs). Their mandatory ten-year payout period doesn't begin until they turn 21. So, they must receive the entire inherited account by age 31.

In the meantime, they must take required minimum distributions (RMDs). These will likely be held in a protected account overseen by their guardian until they reach the age of 18. RMDs for these EDBs are based on the child’s life expectancy. The child must take out the yearly RMD until the end of the calendar year that they turn 31, at which time the retirement account must be fully distributed. It is important to note that the child will have to pay income taxes on any amounts distributed to them. This is usually a non-issue because RMDs for children and young adults are typically minimal, and younger folks are often in a lower tax bracket.

However, once the adult child turns 31, taxes can become an issue. The rest of the account must be distributed to them, and depending on the size of the account, that could mean receiving a large amount of taxable income at a young age.

In addition to the potential tax liability, naming a minor child as the beneficiary of your retirement account comes with other disadvantages. For example, when they reach the age of 18 they will gain complete control over the funds. They could choose to pull everything out at once and spend it on whatever they want.

Naming a Trust as The Beneficiary of a Retirement Account

To protect your funds, you may want to consider creating a trust for your child and naming the trust as beneficiary of your retirement account. This option can work for see-through trusts that meet certain criteria under the law and allow the applicable beneficiaries of the trust to be treated as the beneficiary of your retirement account. There are two types of see-through trusts to consider: conduit trusts and accumulation trusts.

Conduit Trusts

A conduit trust requires all RMDs made from the retirement account to the trust to be distributed to the child (or used for their benefit) as soon as the trust receives it. The trust will provide asset protection and tax deferral for the funds that remain in the retirement account. Also, the terms of the trust can ensure that once the child reaches the age of 18, they won't be able to simply withdraw the entire remaining balance all at once. The trustee can also have the discretion to withdraw funds from the retirement account in addition to the RMDs. This can be useful in emergencies and for big expenses such as education.

In summary, a conduit trust can provide asset protection, tax deferral, and extra time for your child to mature and learn how to handle their money.

Accumulation Trust

Unlike a conduit trust, an accumulation trust provides the trustee with more discretion. They can decide whether to pay out the RMDs to the child or to keep funds in the trust. Funds can stay in the trust and can potentially be protected from claims made by outside creditors. An accumulation trust will enable you to ensure that the funds are not distributed to your child sooner than necessary or desired. But remember, the funds must still be fully withdrawn from the retirement account by the end of the calendar year in which your child turns 31. Any funds retained by the trust instead of distributed to your child will be taxed at the much higher tax rates applicable to trusts rather than the lower rate that is likely to apply to your child.

Discuss Your Options with Our Estate Attorneys in Dublin, OH

There are pros and cons to every type of trust. The one that is best for you and your child will depend on your unique circumstances and goals. We can help you think through whether asset protection, tax minimization, or another goal should be your priority.

And if you already have an estate plan and place, it's important to review it and update beneficiary designations as needed. Some recent law changes may have a big impact on your retirement accounts and RMDs - you may need to change your strategy.

Call us at 614-408-0529 to schedule an appointment.