By proceeding in this alternative fashion, most or all of the IRA and 401(k) benefits made payable in trust for the owner's spouse or descendants will not be includible in the beneficiary's taxable estate at death, yet will be subject to income tax at the beneficiary's presumably lower income tax rates. What is more, in most states most or all of the IRA or 401(k) proceeds will be insulated from the beneficiary's creditors, and will be protected in the event of a divorce or remarriage. (For more on this drafting technique available to estate planning attorneys, see my 2021 book Estate Planning for the SECURE Act: Strategies for Minimizing Taxes on IRAs and 401Ks).
Because the significant adverse income tax consequences associated with paying IRA and/or 401(k) proceeds to trusts, caused by the actions and proposed actions of Congress over the past 35 years, is solvable utilizing the above-outlined trust drafting technique, IRA and 401(k) account owners should no longer hesitate to pay these proceeds to trusts, if their goal is to insulate the same from estate taxes, lawsuits and the rights of a divorced or new spouse of their surviving spouse, descendants, or other beneficiaries.
James G. Blase, CPA, JD, LLM, is principal at Blase & Associates LLC.