Can You Transfer Retirement Accounts into an Irrevocable Trust?

Transferring assets into an irrevocable trust can be an essential part of estate planning, particularly for asset protection and Medicaid eligibility. However, when it comes to retirement accounts like 401(k)s, IRAs, and pensions, the rules are much stricter. Many people wonder: Can you transfer a retirement account into an irrevocable trust?

The short answer is: Not directly. Retirement accounts have specific ownership and distribution rules that make transferring them into an irrevocable trust complex and, in many cases, financially disadvantageous. However, there are alternative strategies to achieve similar estate planning goals.

Why Can't You Transfer a Retirement Account Directly Into an Irrevocable Trust?

Retirement accounts such as 401(k)s, IRAs, and pensions are individually owned assets governed by IRS regulations. These accounts come with tax-deferred growth and required minimum distributions (RMDs) based on the account holder's life expectancy. There are three primary reasons why transferring these accounts into an irrevocable trust isn't feasible:

Loss of Tax-Deferred Status - Moving a retirement account into a trust is considered a withdrawal by the IRS. The entire account balance would be treated as taxable income in the year of transfer, potentially leading to a massive tax bill.
Ownership Restrictions - Most retirement accounts can only be owned by an individual, not an entity like an irrevocable trust. Once funds are withdrawn and placed into a trust, they lose their classification as a retirement asset.
Required Minimum Distributions (RMDs) - IRAs and other qualified retirement plans are subject to RMDs, which must be taken by the account owner or their named beneficiary. Placing these funds into an irrevocable trust can trigger immediate taxation and reduce future tax advantages.

Key Differences Between Naming an Individual vs. a Trust as an IRA Beneficiary

Factor	Individual Beneficiary	Irrevocable Trust Beneficiary
Control Over Distributions	Beneficiary receives full control	Trust controls how funds are distributed
Tax Treatment	Taxed at beneficiary's personal income tax rate	Subject to trust tax rates (higher at lower income levels)
Stretching RMDs	Can stretch RMDs over life expectancy (if eligible)	Must distribute within 10 years (unless an exception applies)
Protection from Creditors	Limited protection unless state laws apply	Stronger protection against lawsuits and creditors
Medicaid & Government Benefits	Direct inheritance may disqualify the beneficiary from benefits	Special needs trust can preserve benefits eligibility
Flexibility	More flexibility in withdrawals	Less flexibility due to trust terms

Alternative Strategies for Protecting Retirement Accounts with a Trust

Even though you can't directly transfer a retirement account into an irrevocable trust, there are several ways to incorporate these assets into an estate plan while achieving asset protection and wealth transfer goals.

1. Naming a Trust as the Beneficiary of a Retirement Account

One of the most common strategies is designating an irrevocable trust as the beneficiary of your retirement accounts. This ensures that upon your passing, the funds will be distributed according to the trust's terms while still benefiting your heirs.

A properly structured see-through trust allows beneficiaries to continue tax-deferred growth while receiving required distributions based on their life expectancy.
A conduit trust can help ensure beneficiaries don't withdraw and spend all the funds at once, providing better long-term financial security.
A discretionary trust can offer more control over distributions, which is particularly useful when leaving assets to minors, spendthrift heirs, or individuals with disabilities.

2. Withdrawing Funds and Transferring to an Irrevocable Trust

If protecting assets is a priority, an alternative is to withdraw funds from a retirement account and then transfer the cash into an irrevocable trust. However, this strategy requires careful planning:

Withdrawals from a traditional IRA or 401(k) will be subject to income tax in the year they are taken.
You may face early withdrawal penalties if you're under 59½.
Once the funds are in the irrevocable trust, they are no longer considered part of your taxable estate and can be protected from creditors or long-term care costs.

3. Rolling Over to a Roth IRA Before Funding a Trust

A strategic option is to convert a traditional IRA to a Roth IRA before incorporating it into an estate plan:

Roth IRAs do not have lifetime RMDs, allowing the assets to grow tax-free for the remainder of the account holder's life.
Upon passing, beneficiaries inherit tax-free distributions if the Roth IRA has been open for at least five years.
Once converted, funds can be withdrawn with fewer tax consequences and transferred to an irrevocable trust if desired.

4. Using a Medicaid Asset Protection Trust (MAPT)

If you're concerned about Medicaid eligibility and protecting assets from long-term care costs, a Medicaid Asset Protection Trust (MAPT) can be used to shield non-retirement assets.

You cannot directly place a retirement account into a MAPT, but you can withdraw and deposit funds (after paying taxes) into the trust.
This strategy must be implemented at least five years before applying for Medicaid to avoid penalties.
Other non-retirement assets, such as real estate, brokerage accounts, and savings, can be transferred to a MAPT for additional protection.

Alternative Strategies for Incorporating Retirement Accounts into Estate Planning

Strategy	How It Works	Pros	Cons
Naming a Trust as Beneficiary	Trust receives IRA funds upon death	Protects assets, controls distributions	Higher taxes, 10-year rule applies
Converting to Roth IRA	Pay taxes now, distribute tax-free later	No RMDs, tax-free inheritance	Immediate tax burden on conversion
Medicaid Asset Protection Trust (MAPT)	Shields non-retirement assets for Medicaid eligibility	Protects other assets, avoids spend-down	Cannot include IRA directly, 5-year lookback applies
Spousal Rollover	Surviving spouse rolls over IRA into their own	Delays RMDs, full control for spouse	Not useful for non-spouse heirs
Charitable Remainder Trust (CRT)	IRA funds go to a trust that pays income to heirs before donating to charity	Tax-efficient, supports a cause	Requires charitable intent, complex setup

Potential Risks and Considerations When Naming a Trust as a Beneficiary

While naming an irrevocable trust as the beneficiary of a retirement account can provide asset protection and control, it also comes with potential downsides that should be carefully evaluated.

1. Tax Consequences of Trust Beneficiaries

When a retirement account passes to a trust, the trust's tax treatment becomes a key factor. Most trusts are subject to compressed tax brackets, meaning:

Trusts pay the highest federal income tax rate of 37% on income over $15,200 (as of 2024).
If the trust retains the distributions, they are taxed at trust rates rather than the typically lower individual tax rates.
A conduit trust can help mitigate this by passing distributions to beneficiaries, who are then taxed at their personal rate.

2. SECURE Act and the 10-Year Rule

The SECURE Act of 2019 changed how non-spouse beneficiaries inherit retirement accounts, eliminating the "stretch IRA" strategy for most heirs. Now, many beneficiaries, including trusts, must withdraw the entire balance within 10 years of the account owner's death. This can accelerate tax liabilities and reduce long-term tax deferral benefits.

However, exceptions apply to eligible designated beneficiaries (EDBs), such as:

Spouses (who can still stretch RMDs over their lifetime).
Minor children (until they reach the age of majority, after which the 10-year rule applies).
Disabled or chronically ill individuals (who may still qualify for lifetime distributions).

3. Loss of Spousal Rollover Options

A surviving spouse typically has the option to roll over an inherited IRA into their own IRA, allowing for continued tax-deferred growth and delaying RMDs until age 73 (as of 2024).

However, if the retirement account is left to a trust instead of a spouse, this rollover option is lost. Instead, the trust must take RMDs under either the 10-year rule or another applicable schedule, which could increase tax liabilities and reduce long-term growth potential.

Key Benefits of Using a Trust for Retirement Assets

Despite the tax complexities, naming a trust as the beneficiary of a retirement account may be beneficial in certain scenarios:

✅ Protection from Creditors & Lawsuits - Assets held in a properly structured irrevocable trust may be shielded from creditors, divorce settlements, or lawsuits against beneficiaries.

✅ Control Over Distributions - If you are concerned about a beneficiary mismanaging their inheritance, a trust can establish structured distributions rather than a lump sum payout.

✅ Special Needs Planning - If a beneficiary is disabled or receiving government benefits, a special needs trust can prevent disqualification from Medicaid or SSI benefits while still allowing them to receive financial support.

✅ Preventing Family Disputes - A trust can help avoid conflicts among heirs by clearly outlining how and when funds should be distributed.

How to Properly Structure an Irrevocable Trust for Retirement Accounts

If you decide that naming a trust as the beneficiary of a retirement account aligns with your estate planning goals, proper trust drafting is essential. The trust must:

Qualify as a see-through trust, meaning it has identifiable beneficiaries and meets IRS requirements.
Clearly outline distribution terms that comply with IRS rules to avoid unintended tax consequences.
Be drafted by an experienced estate planning attorney to ensure compliance with the SECURE Act and state laws.

Additionally, you should regularly review and update your beneficiary designations to reflect changes in laws and personal circumstances.

Contact an Estate Planning Attorney for Trust and Retirement Account Strategies

Navigating the intersection of retirement accounts and irrevocable trusts can be complex, with significant tax implications and legal considerations. While you cannot transfer a retirement account directly into an irrevocable trust, there are alternative strategies that allow you to achieve asset protection and controlled wealth distribution.

If you are considering incorporating an irrevocable trust into your estate plan, consulting an experienced attorney is crucial to ensure your plan is legally sound and tax-efficient.

Contact us today by calling 414-253-8500 or using our online contact form to discuss your options and create a strategy tailored to your financial and estate planning goals.

Frequently Asked Questions (FAQs)

1. Can an irrevocable trust be the owner of an IRA?

No, an irrevocable trust cannot own an IRA while the original account holder is alive. IRAs and other retirement accounts must be owned by individuals. However, a trust can be named as the beneficiary of an IRA, allowing for controlled distributions after the account holder's death.

2. What happens if I name an irrevocable trust as the beneficiary of my IRA?

If you name an irrevocable trust as the beneficiary of your IRA, the trust will receive the required distributions after your death. However, due to the SECURE Act, most trusts must distribute the entire IRA balance within 10 years, which can lead to accelerated tax liabilities unless an exception applies.

3. How can I protect my retirement assets if I can't transfer them to an irrevocable trust?

You can protect your retirement assets by:

Naming a trust as the beneficiary (if structured properly).
Rolling over to a Roth IRA to reduce future tax burdens.
Using a Medicaid Asset Protection Trust (MAPT) for non-retirement assets to shield other assets while preserving Medicaid eligibility.

4. Can a trust reduce taxes on inherited retirement accounts?

In some cases, a properly structured trust can minimize tax burdens, but it depends on the type of trust and the beneficiary structure. Most trusts face higher tax rates on retained income, so a conduit trust or careful planning with a tax professional is recommended.

5. How does a special needs trust work with retirement accounts?

A special needs trust (SNT) can be named as the beneficiary of an IRA to provide for a disabled individual without jeopardizing Medicaid or SSI benefits. The trust must be structured properly to comply with IRS and government aid rules, ensuring that funds are distributed in a way that does not count as income for the beneficiary.