We spend a lot of time discussing trust planning—whether it’s an irrevocable trust or a revocable living trust—and we explore the advantages, disadvantages, and mechanics involved. However, there’s a specific asset class that never goes into any trust, regardless of whether it’s revocable or irrevocable: retirement accounts.
A revocable living trust is typically used to avoid probate by transferring assets from individual ownership into the trust so that, upon death, those assets do not need to go through the probate process. An irrevocable trust is often focused on estate tax planning, asset protection from personal creditor claims or divorcing spouses, and family governance—where generation one sets parameters on how assets are to be used or managed.
Despite these benefits, retirement accounts, such as IRAs (individual retirement accounts), 401(k)s, 403(b)s, and similar plans, cannot be transferred into a trust. By definition, retirement accounts must remain in the individual’s name, and moving them into a trust would necessitate liquidating the account, creating a taxable event. Additionally, these accounts can already avoid probate without being placed in a trust by using proper beneficiary designations—naming a spouse, children, or even a trust as the beneficiary.
For those concerned about estate taxes, retirement accounts remain part of one’s taxable estate to the extent that the individual exceeds the federal estate tax exemption. If you’re under the exemption limit, you’re not subject to estate tax; if you’re above it, you’ll need to pursue other strategies for asset protection or tax minimization. Some states also offer protection for retirement accounts against creditor claims, which is another reason you don’t necessarily need to place them in a trust. In sum, retirement accounts stay in your name, can avoid probate through beneficiaries, and often have built-in protections that make placing them in a trust unnecessary—and, in most cases, impossible.