By Ginsburg Law Group | Estate Planning & Trusts

Most people think of their savings as one big pile: the 401(k), the IRA, the brokerage account, the bank account, maybe an annuity. For estate planning, though, these accounts fall into two very different groups: qualified accounts and nonqualified accounts. The difference affects how the account passes at death, whether it can be titled in your living trust, how your heirs are taxed, and how a trust should be drafted to receive it.

Getting this wrong is one of the most common, and most expensive, estate planning mistakes we see.

What Is a Qualified Account?

In everyday estate planning conversation, a “qualified” account is a tax-advantaged retirement account governed by federal tax rules. Common examples include:

• 401(k), 403(b) and 457(b) plans
• Traditional and Roth IRAs, SEP IRAs and SIMPLE IRAs
• Pensions and other employer retirement plans
• “Qualified” annuities, meaning annuities held inside an IRA or retirement plan

(Technically, tax professionals reserve “qualified plan” for employer plans under Internal Revenue Code §401(a), and IRAs are governed by a separate section. For estate planning purposes, they are treated much the same way, so we group them together here.)

The defining feature: the money grows tax-deferred (or, for Roth accounts, tax-free), and federal law controls who can own the account and how quickly it must be withdrawn.

What Is a Nonqualified Account?

A nonqualified account is everything else you own that is not inside a retirement plan, such as:

• Bank checking, savings and money market accounts, and CDs
• Taxable brokerage and investment accounts
• Nonqualified annuities, purchased with after-tax money outside a retirement plan
• Nonqualified deferred compensation plans offered by some employers to executives

You generally pay tax on the income and gains in these accounts as you go (annuities and deferred compensation are exceptions, discussed below), and there is usually much more flexibility in how they can be owned and transferred.

Side-by-Side: How the Two Types Differ in Estate Planning

Issue	Qualified accounts (401(k), IRA, etc.)	Nonqualified accounts (bank, brokerage, etc.)
Can it be titled in your living trust?	No. It must stay in your name	Usually yes
How it passes at death	Beneficiary designation	Trust title, POD/TOD designation, or your will
Income tax to heirs	Traditional: ordinary income on withdrawals. Roth: generally tax-free	Generally only on income and gains after death
Step-up in basis at death?	No	Yes, for appreciated investments (not annuity gains)
Payout deadline after death	Generally 10 years for most non-spouse heirs	None for bank and brokerage accounts; annuities have their own rules
Trust drafting needs	See-through, conduit or accumulation provisions	Standard trust distribution terms

Qualified Accounts: You Generally Can’t Retitle Them, So the Beneficiary Form Controls

You cannot transfer ownership of an IRA or 401(k) into your revocable living trust while you are alive. Retirement accounts must stay in your individual name. Pulling the money out to “fund” the trust is usually treated as a taxable distribution and may trigger penalties if you are under 59½. We explain this in more detail in Can You Put a 401(k) Into a Living Trust?

Instead, a qualified account passes by beneficiary designation. That form generally overrides your will and your trust. If your trust says one thing and the beneficiary form says another, the beneficiary form will usually win. For many employer plans governed by ERISA, federal law can even override state laws that would otherwise revoke an ex-spouse’s designation after divorce (the U.S. Supreme Court so held in Egelhoff v. Egelhoff, 532 U.S. 141 (2001)). And if you are married, many 401(k) and pension plans require your spouse’s written consent before you can name anyone other than your spouse, including your own trust, as primary beneficiary.

The 10-Year Rule Changes How Trusts Should Be Drafted

Under the SECURE Act, most non-spouse beneficiaries who inherit a retirement account must empty it by the end of the 10th year after the owner’s death (26 U.S.C. §401(a)(9)(H)). If the owner had already reached his or her required beginning date, the IRS’s final regulations (effective for 2025 and later) also require the beneficiary to take annual minimum distributions during years 1 through 9.

Only certain “eligible designated beneficiaries” can still stretch distributions over a longer period: a surviving spouse, the owner’s minor child (until the child reaches majority), a disabled or chronically ill individual, and a person not more than 10 years younger than the owner.

When a trust is the beneficiary, the trust must be drafted to qualify as a “see-through” trust, or the payout period can be even shorter. The two main designs are:

• Conduit trust: The trustee must pass every distribution from the retirement account straight through to the beneficiary. Taxes are paid at the beneficiary’s rates, but the money ends up in the beneficiary’s hands, with less protection.
• Accumulation trust: The trustee may keep distributions inside the trust. This offers more protection from creditors, divorcing spouses, poor spending habits, or loss of government benefits, but income kept in the trust is taxed at trust rates.

For a deeper look, see What Is a See-Through Trust? and The IRA 10-Year Rule and Trust Planning.

Watch the Trust Tax Brackets

Trusts hit the top federal income tax bracket fast. For 2026, a trust reaches the 37% bracket at just $16,000 of retained taxable income. An individual filing single does not reach 37% until more than $640,600 (IRS Rev. Proc. 2025-32). A large traditional IRA that must be withdrawn within 10 years, and is accumulated in a trust, can produce a heavy tax bill. Good drafting gives the trustee flexibility to distribute income when that makes more sense.

No Step-Up in Basis for Retirement Accounts

Traditional IRA and 401(k) money has never been taxed, so heirs pay ordinary income tax as they withdraw it. Unlike stocks or real estate, these accounts do not receive a step-up in basis at death. The Internal Revenue Code specifically excludes “income in respect of a decedent” from the step-up rules (26 U.S.C. §1014(c)). Roth accounts are different: qualified Roth distributions are generally income-tax-free to heirs, although the 10-year rule still applies.

Nonqualified Accounts: Usually Retitle Them Into the Trust

Nonqualified accounts are much easier to coordinate with a living trust:

• Bank and brokerage accounts can usually be retitled in the name of your trustee (for example, “Jane Smith, Trustee of the Jane Smith Revocable Trust”). Once retitled, they are governed by the trust and avoid probate. A payable-on-death or transfer-on-death designation naming the trust can also work.
• Step-up in basis: Appreciated investments in a taxable account generally receive a new basis equal to their value at death (26 U.S.C. §1014), which can wipe out years of built-in capital gains for your heirs. In community property states such as California, Arizona and Texas, both halves of community property can receive a step-up at the first spouse’s death. See our post on Arizona couples and the double step-up.
• Holding assets in trust after death: Because the account is not subject to the retirement-plan payout rules, your trust can hold, invest and distribute the assets over whatever timeline you choose, such as at ages 25, 30 and 35, for education only, or for a beneficiary’s lifetime.

Two Nonqualified Assets That Need Special Care

Nonqualified annuities. Annuities are tax-deferred even outside a retirement plan, and they carry their own rules. If an annuity is owned by a “non-natural person,” it can lose its tax-deferred status, though the Code makes an exception for a trust holding the contract as an agent for a natural person (26 U.S.C. §72(u)). A revocable living trust is often treated as meeting that exception, but this must be confirmed before retitling. Federal law also requires annuities to pay out after the owner’s death within set time frames (§72(s)), and naming a trust instead of an individual can limit the options. Like retirement accounts, the built-in gain in an annuity is taxed as ordinary income to the heirs, without a step-up.

Nonqualified deferred compensation. Executive deferred compensation plans are an unsecured promise by your employer to pay you later. They usually cannot be transferred to a trust, they pass under the plan’s own beneficiary form, and they are taxed as ordinary income when paid. Read the plan document before naming a trust as beneficiary.

Smart Planning Moves That Use the Difference

Knowing which accounts are qualified and which are not can unlock planning opportunities:

• Leave retirement accounts to charity and taxable accounts to family. A charity pays no income tax on an inherited IRA, while your children can receive a step-up on brokerage assets. If you plan to make charitable gifts at death, the traditional IRA is often the most tax-efficient asset to give.
• Match the asset to the beneficiary. A beneficiary in a low tax bracket may be the best recipient of traditional IRA money, while a high earner may be better off inheriting stepped-up investment accounts or a Roth.
• Consider Roth conversions. Converting during lower-income years means you pay the tax now, at your rate, instead of your heirs paying it later, possibly at higher rates or through a trust.
• Use separate trust provisions for retirement accounts. Many well-drafted trusts include a dedicated retirement-benefits section, or a separate standalone retirement trust, so that see-through rules do not restrict the rest of the estate.
• Audit every beneficiary form. Confirm primary and contingent beneficiaries on every IRA, 401(k), annuity and life insurance policy, and confirm that every nonqualified account is either titled in the trust or has a designation that matches your plan. See Should You Name Your Living Trust as the Primary or Contingent Beneficiary of Your 401(k)?

Common Mistakes

• Cashing out an IRA or 401(k) to “put it in the trust”
• Naming “my estate” as beneficiary of a retirement account, which can force probate and accelerate taxes
• Naming an old trust that was never updated for the SECURE Act
• Forgetting to retitle brokerage and bank accounts after signing the trust, leaving them subject to probate
• Assuming a will or trust controls an account that actually passes by beneficiary designation
• Retitling an annuity without confirming its tax treatment first

Frequently Asked Questions

Can my revocable trust own my IRA?

No. Your IRA must remain in your name. Your trust can be named as the beneficiary that receives the account at your death.

Should my trust be the beneficiary of my retirement accounts?

It depends. A surviving spouse is often named first because of spousal rollover rights. A trust may be the better choice for minor children, beneficiaries with special needs, blended families, or beneficiaries who need protection. The trust must be drafted with the retirement-account rules in mind.

Should my brokerage account be in my trust?

Usually, yes. Retitling it in the trust (or using a transfer-on-death designation that matches your plan) helps avoid probate and lets your trustee manage it under your instructions.

Do my heirs pay tax on my brokerage account?

Generally not on gains that built up during your lifetime, because of the step-up in basis. They pay tax only on gains after your death, plus ordinary taxes on dividends and interest.

The Bottom Line

Qualified and nonqualified accounts follow different rules, and a good estate plan treats them differently. Retirement accounts pass by beneficiary designation, are subject to the 10-year rule, and carry built-in income tax. Your trust must be drafted to receive them properly. Nonqualified accounts usually belong in your living trust, where they can receive a step-up in basis and be held on your terms.

This article is for general informational purposes only and is not legal or tax advice. Tax rules change, and how they apply depends on your circumstances. Consult an attorney and a tax professional before making decisions about your accounts.

Ready to make sure your retirement accounts, investment accounts and trust work together? Contact Ginsburg Law Group to schedule an estate planning review.