When most people designate beneficiaries for their retirement accounts, they often have a “set it and forget it” mentality. After all, these funds are not likely to be accessed for decades, far off in the hazy future. Unfortunately, a lack of attention now to beneficiary designations could lead to heartache, family feuds, and negative tax consequences down the road. Here are some things to consider in designating beneficiaries for your retirement accounts.

Direct Distribution or Trust?

Many financial planners recommend making one’s spouse or children the beneficiaries of a retirement account for the tax advantages of doing so. When funds from a retirement account are distributed outright to beneficiaries, the taxes on the distribution can be spread out over time. However, when a trust is named as the beneficiary, all taxes due on the distribution must be made at the time the funds are distributed to the trust.

In light of only this information, it would seem that distributing funds directly to intended beneficiaries, rather than through a trust, is clearly the way to go. However, a trust may have several advantages that outweigh the tax benefits of direct distribution.

One such advantage is increased control for the grantor of the trust—you. By designating a trust as the beneficiary of your retirement account, you can control who receives payments, how much and how often. Depending on the age and maturity level of your children, this can be a tremendous benefit. When funds are distributed directly, not through a trust, the beneficiary has unfettered access to all the money, all at once, so long as he or she is legally an adult. If the idea of your twenty-two year old suddenly getting his hands on a hundred thousand dollars makes you uneasy, consider a trust.

Not only can a trust protect your intended beneficiaries from themselves, it can protect them from creditors. In a relatively recent case, a retirement account beneficiary who received an outright distribution from the account had those funds seized by a creditor of which his parents had been unaware. The reality is that adult children don’t always tell their parents about financial problems they’re experiencing.

An even more common scenario is one in which a beneficiary is married, receives a distribution directly from a late parent’s retirement account, and deposits those funds in a joint account with a spouse. If the couple later divorces, and the court determines that the funds were commingled with marital funds, the ex-spouse of the beneficiary could take half of them, or perhaps even more.

Protecting Your Beneficiaries

For those parents who have worked hard to build wealth and don’t feel comfortable with their children’s money-management skills, a spendthrift trust may provide an extra level of protection from creditors or the child’s own impulsive decisions.

A spendthrift trust is a specific type of irrevocable trust created for the benefit of a recipient who may struggle to manage and spend money wisely. With a spendthrift trust, an independent trustee has complete authority to make all decisions about how the trust’s funds will be distributed for the benefit of a beneficiary. One significant advantage of a spendthrift trust is that the beneficiary’s creditors usually cannot attach or seize the trust’s assets, because those assets are not under the control of the beneficiary.

We have been discussing adult children as beneficiaries, but many people name a spouse as the primary beneficiary of a retirement account. The same protections can be put in place through trusts for spouses as for children. If you do name your spouse as beneficiary, don’t forget to name a contingent beneficiary (such as your children or a trust for their benefit) in the event the primary beneficiary dies before you. Naming a contingent beneficiary prevents the retirement account funds from reverting to your estate, where they would have to go to probate before being distributed to your heirs.

The best option for you depends on your circumstances, the needs of your family, and how the law intersects with those factors. Financial planners may be able to advise you about tax consequences, but not about legal protections for your assets and family, so talk to an experienced Oakland County estate planning attorney. Attorney James Hubbert can help you protect both your hard-earned retirement account assets and the people you want them to benefit.