Will my trust need to pay tax on income distributed to the beneficiaries?

December 10, 1999

From:  C.T. Anderson
Date:  Tue, 30 Nov 1999

I am setting up a living trust and am thinking of making the trust a beneficiary of my 401K plan, profit-sharing plan and my company life insurance policy. From what I have learned thus far, the trust has to submit a tax form showing these funds as income when they become property of the trust at the time of my death.

However, if I understand correctly, the trust does not have to pay taxes on that income if it is then distributed to the trusts' beneficiaries within the calendar year the funds are received. Is this correct?

I would appreciate any information you could share on this topic. Many thanks.

Chas. T. Anderson
Dallas, Texas


Date:  Wed, 01 Dec 1999

Hello C.T.,

Thanks for your question.

When you make a living trust the beneficiary of your retirement accounts, your plan becomes much more complex. You should probably get a good tax attorney involved.

There is no probate-avoidance advantage in making a trust the beneficiary of the retirement accounts (or the life insurance).

When you have named beneficiaries of your retirement accounts, it's much easier to extend the payout of the retirement benefits after your death.

If you are married, it's also easier to qualify for the unlimited marital deduction for the retirement accounts by making your spouse the beneficiary and there is a bonus that the spouse can rollover the account to his or her own name and make corrections for any bad distribution elections that you made.

You are correct that retirement benefits distributed to a trust are taxed to the trust beneficiaries when the trust distributes them in the same year. There is also an election where distributions made within 65 days after the year end may be treated as paid by the year end.

Good luck!
Mike Gray

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