Deciding what happens to your 401(k) after you’re gone is more involved than many people realize. Unlike other assets that pass through a will, retirement plan assets are transferred based on the beneficiary designations on file with the plan administrator. That means thoughtful planning is required to ensure these funds go where you intend—and in a way that supports your broader estate goals.
For some individuals, naming a trust as the beneficiary of a 401(k) offers added flexibility and protection. However, this choice also has important tax and distribution rules that can significantly affect outcomes. Knowing when to use a trust and how to structure it correctly can help preserve your retirement savings for the people and purposes you care about most.
Can a Trust Be a Beneficiary of a 401(k)?
Yes, a trust as a beneficiary is allowed under IRS rules for a 401(k) or 403(b) retirement plan. You can legally name a trust to receive your account assets after your death, just as you would name an individual. However, the structure and terms of the trust will determine how the funds are taxed and how quickly they must be distributed.
A key concept to understand is whether the trust qualifies as a “designated beneficiary.” A designated beneficiary must either be an individual or a type of trust that allows the IRS to identify the underlying people who will benefit from the account. If the trust meets these conditions—often referred to as a “see-through” trust—then it may allow for slower, tax-favored distributions.
The trust is considered a non-designated beneficiary if it does not meet these requirements. This usually triggers a shorter withdrawal timeline. This may result in a greater tax burden, especially if the account holds a large sum of money.
For this reason, choosing to name a trust requires careful planning. The trust must be written in a way that complies with IRS rules and aligns with your goals for how and when the funds should be distributed. Collaborating with professionals familiar with estate planning and retirement account regulations can guide you toward a choice that properly fits your circumstances.
When Might Someone Want to Name a Trust Instead of an Individual?
Choosing whom to name for your 401(k) can sometimes be more complicated than simply picking a single person. There are moments when a trust arrangement provides specific benefits that direct naming might not. In many retirement plans, naming a trust can also accommodate more complex family structures or personal objectives. Consider the following situations if you wonder about naming a trust rather than naming individual beneficiaries:
Minor or vulnerable beneficiaries: If you have a child, a dependent, or another person who may not be prepared to handle a lump-sum distribution, a trust can help manage these funds. The trust sets parameters on access, so the money is used responsibly over time. Rather than leaving an unprepared beneficiary with a significant financial decision, you can establish guidelines to secure their interests.
Control over how assets are used: When you want to specify certain conditions, a trust offers the flexibility to release funds based on events or timelines that you decide. This can help when you want to make sure that the inheritance is put toward education, housing, or other important uses. You remain in control by setting the pace and purpose of distributions.
Second marriages or blended families: Families with multiple relationships sometimes prefer a structure that prioritizes a spouse while still providing for children from a previous partnership. A trust serves as a roadmap, guiding how and when funds reach each beneficiary. This arrangement offers a balanced approach that respects everyone’s interests.
Asset protection considerations: While 401(k)s are protected from creditors under federal ERISA rules, that protection can disappear if the funds are passed to a non-spousal beneficiary. A trust can add another layer of protection, helping shield the money from lawsuits, divorce, and other financial strains. This can be especially useful if the beneficiary has existing liabilities or lives in a state with weaker asset protection laws. A trust also adds structure, reducing the chances of conflict or misuse after you’ve passed.
Long-term legacy planning: A trust can help pass resources along multiple generations according to specific instructions. This can give you confidence that your retirement account distributions will be preserved for the future. Such long-term oversight helps shape the future for your loved ones in a way that aligns with your desires.
How Trust Beneficiaries Affect 401(k) Distributions
When a trust is named as the beneficiary of a retirement account like a 401(k), the timing and taxation of withdrawals can change dramatically. These outcomes depend on how the trust is structured and whether it qualifies under IRS rules. Here’s what to know about how trust status affects the payout timeline—and how much flexibility your heirs might have.
Under the SECURE Act, most inherited retirement accounts must be emptied by the end of the 10th year after the account holder dies.1 This timeline generally applies whether an individual or a trust inherits the account—unless an exception applies. One such exception for individuals involves an Eligible Designated Beneficiary (EDB), which refers to certain people granted special status under the law. These include a surviving spouse, the account owner’s minor child (until they reach the age of majority), a disabled or chronically ill person, or someone no more than 10 years younger than the deceased.
Whether a trust can stretch out withdrawals depends on whether it qualifies as a “see-through” trust. This designation allows the IRS to identify the actual individuals who will benefit from the account, which affects how the assets will be subjected to required minimum distribution (RMD) rules.
If the trust is not see-through, the withdrawal schedule is less favorable:2
- If the account holder passes away before their required beginning date for distributions, the trust typically must empty the account within five years.
- If death occurs after that date, the trust must begin taking (RMD) payouts based on the account holder’s remaining life expectancy—not the beneficiary’s.
When a trust does qualify as a see-through trust, it can allow for life expectancy payouts when going to EDBs. These are generally calculated based on the oldest beneficiary named in the trust.3 Even if the trust has multiple beneficiaries, the IRS uses the age of the oldest one to determine the payout schedule. This can shorten the window and potentially increase the tax burden compared to individual designations.
Another factor is how the trust handles the funds it receives. Some trusts (called conduit trusts) pass all distributions directly to the named individuals, while others (accumulation trusts) hold onto the money and distribute it later. These decisions impact whether the income is taxed at the trust level or passed through to individual tax returns.
How to Name a Trust as a 401(k) Beneficiary – Step by Step
Some 401(k) custodians allow you to list a trust directly on your beneficiary form, but others have tighter guidelines. It’s always wise to verify the rules before proceeding. This process typically involves reviewing your current documents, setting up the proper legal language, and filing the correct paperwork. Below are the major steps to review when you plan to name a trust on your 401(k):
Check if your plan allows trust beneficiaries: Most 401(k) plans allow trusts to be named as beneficiaries, but how the trust is treated for tax purposes depends on whether it qualifies as a “see-through” trust under IRS rules. Make sure to read your policy statement or speak with the plan’s representative to confirm what is allowed under the plan document.
Work with an estate planning attorney: Collaborating with estate planning attorneys is a key step in preparing the trust to meet IRS requirements for see-through status if you want the beneficiaries to take RMDs based on their life expectancies rather than faster distribution timelines.
Submit the correct beneficiary designation form: Some administrators have very specific forms you need to use. Incorrect or incomplete details can override your intentions, so verify that you have included all required data.
Coordinate with your broader estate plan: Review the trust language carefully to confirm it matches the wording in your will, power of attorney, and other legal documents. Consistency across documents supports a unified approach to inheritance.
Keep documentation current and complete: Periodic updates to your 401(k) file, trust details, and other records can prevent surprises. Notifying any financial advisors about the changes is also helpful so everyone has the latest information.
Alternatives to Naming a Trust as Beneficiary
Listing a trust as the primary recipient of your 401(k) is not the only approach. Some people prefer more direct methods, or they split up the account to achieve specific goals. Each option carries its own pros and cons, particularly in terms of taxes and administrative steps. Below are a few alternative strategies to consider:
Naming individuals directly: By naming loved ones outright, each person can decide how to handle their share. This method often allows for more flexible withdrawals and can simplify the transfer process.
Designating a trust as a contingent beneficiary: Instead of placing the trust first in line, you can list it as a secondary recipient. This approach applies when the primary beneficiary dies before the assets are distributed. Using contingent beneficiaries in this way allows you to keep trust provisions available without making them the first recipient.
Splitting retirement accounts: You might split your 401(k) so that part goes to specific individuals and part goes into a trust. This method offers a blend of direct inheritance and controlled distribution, which can address multiple objectives simultaneously.
Using life insurance for control: Another option is to direct your 401(k) to individuals while using a life insurance policy that pays into a trust to provide liquidity and structured control over those funds, especially when you want the 401(k) to pass directly to heirs but still support trust goals.
Special Considerations for High-Net-Worth Individuals
Those with a larger estate may have to consider estate tax thresholds when deciding who inherits a 401(k). Federal and state tax laws can intersect in ways that significantly influence how much of the account ultimately transfers to heirs. Some people with many assets also look into strategies that incorporate charitable giving to reduce the overall tax hit.
Charitable remainder trusts are sometimes used to balance the goal of providing for heirs while also benefiting a nonprofit organization. These setups can offer tax benefits, but they must be thoughtfully designed to prevent unintended consequences. Consulting a professional who understands both tax laws and trust provisions can help clarify the best course.
Another factor for high-net-worth individuals is the compressed tax bracket that applies to trusts. Any income retained in the trust could be taxed at higher rates (37% in 2025 after just $15,650 of retained income) than if held by an individual.4 Additionally, different states have varying rules about how distributions to trusts are taxed, which could affect your heirs in multiple jurisdictions.
FAQs About Trusts and Retirement Accounts
Questions often come up when deciding how to pass along 401(k) funds through a trust. The interplay of tax law, beneficiary designations, and personal goals can spark curiosity about the best methods. Below are several common inquiries and their answers:
1. Is it better to name a trust or an individual as beneficiary?
For some, naming a direct beneficiary can be simpler. It can also allow for the beneficiary to spread out withdrawals over their own life, which may reduce yearly tax burdens. On the other hand, a trust might provide more control, asset protection, or help for heirs who are minors or need structured oversight. Your decision should reflect your individual priorities, the overall value of your estate, and the way you prefer the distributions to be handled.
2. What happens if the trust doesn’t qualify as a see-through trust?
If the trust is not see-through, it may be treated as a non-designated beneficiary. This status often triggers a faster payout timeline that can lead to higher taxes in a shorter period. It also limits the ability to stretch distributions over an individual’s life. Reviewing the trust language beforehand is key to avoiding undesired taxation.
3. Can a revocable living trust be named as a 401(k) beneficiary?
Yes, a revocable living trust can be named, though you should be aware of the same see-through requirements if you hope to extend distributions. When the trust becomes irrevocable upon your passing, its terms dictate how and when the funds are disbursed. Always keep your trust language updated to align with current laws and plan rules.
4. Can you change from a trust to an individual beneficiary later?
Yes, as long as you are still alive and competent to modify your beneficiary designations, you can switch from a trust to an individual. The key is to file updated forms with your plan administrator. It’s beneficial to review your designations periodically anyway, since life events such as marriage, divorce, or new children might alter your planning goals.
We Can Help You Plan Around 401(k) Beneficiaries
Designating beneficiaries on your 401(k) is a key decision that directly influences how your wealth will be distributed and taxed after your death. While naming individuals can offer simplicity, using a trust may provide greater control, structure, and protection—particularly when your estate plan involves multiple generations, complex family dynamics, or specific financial goals.
Whether you’re trying to shield funds from creditors, manage distributions for young or vulnerable heirs, or integrate your 401(k) into a long-term giving plan, a trust can be a helpful tool when properly set up. The rules around trust eligibility, payout timing, and tax treatment are detailed, so aligning your choices with current regulations and your broader financial picture is important.
If you’re unsure which path best fits your needs, we can help you evaluate the trade-offs and create a plan that reflects your intent. Our financial advisory team will review your existing retirement plan assets, coordinate with your estate planning documents, and help you understand how your designations affect future outcomes. Schedule a complimentary consultation to explore your options and gain clarity around how your 401(k) fits into your overall legacy.
Resources:
- https://www.fiduciary-trust.com/insights/naming-trust-ira-beneficiary/#:~:text=The%2010%2Dyear%20rule%20may,as%20long%20as%20their%20lifetime
- https://www.kitces.com/blog/discretionary-see-through-trusts-accumulation-secure-act-designated-beneficiary-mbt-guidelines/#:~:text=Notably%2C%20though%2C%20the%20post%2D,to%20the%20underlying%20trust%20beneficiaries%29
- https://thelink.ascensus.com/articles/2019/11/20/what-to-know-about-trusts-as-ira-beneficiaries
- https://www.legalzoom.com/articles/how-trusts-are-taxed
Clayton joined AP Wealth Management as a fee-only financial planner in 2019 bringing with him over a decade of experience working as a financial planner and investment advisor. Clayton is passionate about the commission-free business model that allows him to sit on the same side of the table as the client, serving as a fiduciary for them.
