By Ginsburg Law Group | Estate Planning & Trusts

When creating an estate plan, many people assume that all their assets should be transferred into their revocable living trust. Their homes, bank accounts, investment accounts, and other property may be transferred into the trust to simplify estate administration and help avoid probate.

But what about a 401(k)?

The answer may surprise you: You generally cannot transfer ownership of your 401(k) directly into a living trust while you are alive. However, you can name your trust as the beneficiary of the account after your death.

Understanding this distinction is essential to protecting your retirement savings, avoiding unnecessary taxes, and ensuring your assets pass to your loved ones according to your wishes.

Why Can’t You Transfer a 401(k) Into a Living Trust?

A 401(k) is different from an ordinary bank or investment account. It is a tax-advantaged retirement account governed by federal law, including the Internal Revenue Code and, for many plans, the Employee Retirement Income Security Act (ERISA).

Because of these special rules, a 401(k) generally must remain within the qualified retirement plan while you participate in it.

Unlike a home or a traditional brokerage account, you cannot simply change the title of your 401(k) to the name of your living trust.

Attempting to move the money into a trust during your lifetime could require withdrawing funds from the retirement plan, potentially creating significant tax consequences.

What Happens If You Withdraw Your 401(k) to Fund a Trust?

Depending on your circumstances, withdrawing money from a traditional 401(k) may result in:

• Ordinary income taxes: Withdrawn pretax funds are generally subject to federal income tax and potentially state income tax.
• Early withdrawal penalties: If you are younger than 59½, a 10% additional federal tax may apply unless an exception is available.
• Loss of tax-deferred growth: Once funds leave the retirement account, they generally lose the account’s tax-deferred investment treatment.
• Reduced retirement savings: A large withdrawal could significantly affect your long-term financial security.

Additionally, not every 401(k) permits withdrawals while you are still employed.

The bottom line: Transferring money out of a 401(k) merely to place it into a living trust is generally unnecessary and may be financially harmful.

Can You Name Your Living Trust as the Beneficiary of Your 401(k)?

Yes.

Although your trust generally cannot own your 401(k) during your lifetime, it can be designated as the beneficiary who receives the retirement benefits after your death.

For example, suppose you establish the Smith Family Revocable Living Trust.

You may transfer your home, certain bank accounts, and other eligible assets into that trust during your lifetime.

Your 401(k), however, remains in your retirement plan.

Instead of transferring ownership, you may designate the Smith Family Revocable Living Trust as the beneficiary of your 401(k), subject to the plan’s requirements and any applicable spousal consent rules.

When you die, the retirement benefits can pass according to that beneficiary designation and be administered under the terms of your trust.

This arrangement may allow you to maintain greater control over how your retirement assets ultimately benefit your family. (Whether the trust should be the primary or the contingent beneficiary is its own question; see Should You Name Your Living Trust as the Primary or Contingent Beneficiary of Your 401(k)?)

Why Would Someone Name a Trust as Their 401(k) Beneficiary?

Naming a trust as beneficiary can be particularly useful when an estate plan involves minor children, beneficiaries with disabilities, blended families, or individuals who may need assistance managing money.

1. Protecting Minor Children

Leaving a substantial retirement account directly to a minor child can create complications because minors generally cannot independently manage inherited financial accounts.

A properly drafted trust can appoint a trustee to manage inherited assets and distribute funds for the child’s health, education, maintenance, and support.

2. Controlling When Beneficiaries Receive Money

Some parents do not want their children to receive a large inheritance immediately upon reaching adulthood.

A trust can establish conditions governing how inherited funds are managed and distributed.

However, the trust must still comply with applicable retirement account distribution rules, which may require the retirement funds to be withdrawn from the inherited account sooner than the beneficiaries receive distributions from the trust.

3. Providing for a Beneficiary With Disabilities

A properly structured special needs trust may help provide financial support while preserving eligibility for certain means-tested government benefits.

Specialized retirement-beneficiary planning is particularly important in these circumstances.

4. Planning for Blended Families

A trust may help balance the interests of a surviving spouse and children from a prior relationship.

However, federal spousal beneficiary protections and the retirement plan’s rules must be carefully considered.

5. Protecting an Inheritance From Financial Mismanagement

An appropriately drafted trust may provide oversight when a beneficiary struggles with financial management, creditors, or other circumstances.

The extent of any creditor protection depends on the trust’s terms, applicable law, and whether retirement funds have already been distributed.

The SECURE Act: Why Naming a Trust Requires Special Planning

The Setting Every Community Up for Retirement Enhancement (SECURE) Act significantly changed the rules governing inherited retirement accounts.

Under the current rules, many non-spouse beneficiaries must withdraw the entire inherited retirement account by the end of the tenth year following the original owner’s death.

For example:

John dies in 2026, leaving a $500,000 traditional 401(k) to his adult daughter.

Assuming she is subject to the standard 10-year rule, the inherited retirement account generally must be fully distributed by December 31, 2036.

Depending on whether John died before or after his required beginning date, annual required minimum distributions may also apply during that period.

These distributions can create significant income tax consequences.

Importantly, naming a trust as beneficiary does not automatically eliminate or extend the 10-year withdrawal requirement.

Certain beneficiaries, including surviving spouses, qualifying minor children of the account owner, disabled or chronically ill individuals, and individuals not more than 10 years younger than the account owner, may qualify for different distribution rules.

What Is a See-Through Trust?

When a trust is named as the beneficiary of a retirement account, special IRS rules determine whether the trust’s beneficiaries can be treated as designated beneficiaries for required minimum distribution purposes.

A trust that meets these requirements is commonly called a see-through trust.

Generally, the trust must:

• Be valid under applicable state law.
• Be irrevocable or become irrevocable upon the retirement account owner’s death.
• Have identifiable beneficiaries.
• Satisfy applicable documentation requirements.

Failing to meet these requirements may result in less favorable retirement account distribution rules.

Two common trust structures used in retirement planning are conduit trusts and accumulation trusts.

Conduit Trusts

A conduit trust generally requires retirement account distributions received by the trust to be passed along to or for the benefit of the designated trust beneficiaries.

This structure may simplify certain retirement distribution considerations, but it can limit the trustee’s ability to retain distributed retirement funds.

Accumulation Trusts

An accumulation trust can permit the trustee to retain retirement account distributions within the trust rather than immediately distributing them to beneficiaries.

This can provide greater control over the inheritance.

However, retained taxable income may be subject to compressed trust income tax brackets, potentially resulting in higher income taxes than if the funds were distributed directly to individual beneficiaries.

Neither structure is automatically better. The appropriate approach depends on the beneficiaries, the client’s goals, and the tax implications.

What If You Simply Leave Your 401(k) Directly to Your Children?

For some families, naming individual beneficiaries directly may be the simplest and most tax-efficient solution.

Retirement accounts with valid beneficiary designations generally pass outside probate, even when they are not owned by a living trust.

This means you do not necessarily need to name your trust as beneficiary merely to avoid probate.

For example, a parent with three financially responsible adult children might name each child as an equal beneficiary of the 401(k).

Each child may then be able to manage their inherited retirement benefits separately, subject to the plan’s rules and applicable federal distribution requirements.

By contrast, when beneficiaries are minors, have special needs, or require financial oversight, a trust may provide important advantages.

The key is choosing a beneficiary arrangement that complements the rest of the estate plan.

Can You Roll Your 401(k) Into an IRA and Then Put the IRA Into a Trust?

This is another common question.

Depending on the plan and your eligibility, you may be able to roll your 401(k) into an individual retirement account (IRA).

A properly completed direct rollover can generally avoid immediate income taxation.

However, an IRA generally cannot be retitled into the name of your revocable living trust during your lifetime either.

Like a 401(k), an IRA has special federal tax rules.

You may instead designate your trust as the beneficiary of the IRA.

An IRA may offer different investment options and beneficiary administration features, but whether a rollover makes sense depends on your financial circumstances, fees, investment choices, and retirement planning objectives.

Does Your Will Control Who Inherits Your 401(k)?

Not necessarily.

One of the most common estate planning mistakes is assuming that a will or living trust automatically determines who receives retirement benefits.

In most cases, a valid 401(k) beneficiary designation controls who receives the account upon death, subject to applicable law and plan requirements.

For example, suppose your will leaves everything equally to your three children, but your 401(k) still names your former spouse as beneficiary.

That outdated designation could create serious complications and, depending on the applicable law and plan terms, may result in benefits passing differently than you intended. For 401(k) plans governed by ERISA, the U.S. Supreme Court has held that federal law preempts state statutes that would otherwise automatically revoke a former spouse’s beneficiary designation upon divorce (Egelhoff v. Egelhoff, 532 U.S. 141 (2001)), so the plan may pay the former spouse named on the form.

This is why reviewing retirement account beneficiary designations is an essential part of estate planning.

Beneficiary designations should be reviewed after major life changes, including marriage, divorce, the birth of a child, or the death of a loved one.

Five Common 401(k) Estate Planning Mistakes

Mistake #1: Attempting to transfer a 401(k) into a living trust during life. Doing so may require a taxable distribution and could undermine retirement savings.

Mistake #2: Assuming a will overrides a beneficiary designation. Retirement benefits generally pass according to the plan’s valid beneficiary designation.

Mistake #3: Naming a trust without reviewing the SECURE Act rules. An improperly drafted trust may create unfavorable distribution or tax consequences.

Mistake #4: Forgetting to update beneficiaries after major life changes. Outdated designations can lead to unintended results and disputes.

Mistake #5: Assuming every asset should be owned by a living trust. Effective estate planning involves coordinating different types of assets, not necessarily transferring everything into one trust.

The Bottom Line: Your 401(k) Can Be Part of Your Trust-Based Estate Plan Without Being Owned by Your Trust

A comprehensive estate plan should address your retirement accounts, real estate, investments, bank accounts, insurance policies, and other assets.

But different assets require different planning strategies.

While a 401(k) generally cannot be transferred directly into a living trust during your lifetime, naming a properly drafted trust as beneficiary may allow your retirement savings to be administered according to your wishes after death.

The right approach depends on your family circumstances, the ages and needs of your beneficiaries, your tax situation, and your overall estate planning goals.

Need Help Coordinating Your Retirement Accounts and Estate Plan?

At Ginsburg Law Group, we understand that estate planning involves more than simply preparing a will or trust. It requires making sure your assets, beneficiary designations, and estate planning documents work together.

Whether you are creating a revocable living trust, updating an existing estate plan, or deciding how to leave retirement assets to your children or other loved ones, our attorneys can help you evaluate your options.

Contact Ginsburg Law Group to discuss your estate planning needs and develop a plan designed to protect your assets and your family’s future.

Disclaimer: This article is provided for general informational purposes only and does not constitute legal or tax advice. Retirement plan rules, beneficiary requirements, and tax consequences vary based on individual circumstances and applicable law. Consult a qualified estate planning attorney and tax professional before making changes to retirement accounts or beneficiary designations.