Make Sure Your Retirement Accounts Still Do What You Intended

Why This Matters

One of the greatest benefits of your IRA or 401(k) is the tax-free growth that happens while the money stays in the account. Your beneficiaries don’t pay income tax until they take withdrawals.

That’s why it’s so important to make sure each beneficiary receives the longest “stretch period” the law allows. Those extra years of tax-deferred growth can make a huge difference.

But under the SECURE Act, not everyone gets the same stretch:

• Some beneficiaries still qualify for a lifetime stretch
• Most adult children get 10 years
• Certain beneficiaries must empty the account in 5 years

Your beneficiary designations — not your will or trust — control all of this.

 

How Retirement Accounts REALLY Transfer When You Die

Retirement accounts do not follow your will or trust.
They follow your Beneficiary Designation Form, and there are three ways to use that form.

Path 1: Name a beneficiary directly

This is the simplest and most rigid option.

If your beneficiary becomes disabled, starts receiving needs-based government benefits like SSI or Medicaid, goes bankrupt, becomes an addict, etc., then an outright inheritance can cause them to lose their benefits, the money could be lost to creditors, or might be spent on drugs or alcohol.

Direct designations are a blunt instrument — they always fire exactly as written, even when life circumstances have changed.

Path 2: Name the trustee of your trust AND identify each beneficiary and their share

This option uses the structure and protections of your trust while still complying with SECURE Act rules.

To use this method, your beneficiary form must:

1. Name the trustee,
2. Identify each beneficiary, and
3. Specify each beneficiary’s percentage share.

Example:

“½ to the trustee of the <Name> Revocable Trust for the benefit of Child A”
“½ to the trustee of the <Name> Revocable Trust for the benefit of Child B”

How does a well-drafted trust protect the stretch for each beneficiary?

A trust designed correctly will include instructions telling the trustee exactly how to preserve each person’s stretch period.

For example:

• If Child A is a healthy adult at your death and receives their inheritance outright, the trustee can instruct the IRA custodian to set up an inherited IRA directly for Child A, giving them the full 10-year stretch most adult beneficiaries receive.
• If Child A is disabled and receiving SSI or Medicaid, that same well-drafted trust will reroute Child A’s share into a special needs trust, which allows Child A to continue receiving their benefits and still potentially qualify for a lifetime stretch under the SECURE Act’s rules for disabled beneficiaries.

In other words, your trust acts like a smart traffic controller — directing each beneficiary’s share into the structure that gives them the most protection and the best tax outcome.

This is one of the main advantages of using a trust instead of relying solely on the beneficiary form.

Path 3: Name the trustee of your trust, and let the trust immediately divide the IRA into separate shares

This path is more complex but sometimes necessary.
With this approach, your beneficiary designation simply says:

“to the trustee of the <Name> Revocable Trust.”

Then the trust itself must contain special language requiring that your IRA be divided into separate shares for each beneficiary immediately upon your death.
If drafted properly, this preserves each beneficiary’s correct stretch period.

When is Path Three the best option?

This method works best when you have a group of potential beneficiaries, and you only want those who are alive at your death to inherit.

Examples:

• Nieces and nephews
• “My siblings who survive me, in equal shares”
• A beneficiary class that changes over time

Most IRA custodians cannot handle these conditional situations on a beneficiary form — but a well-drafted trust can.

(For attorneys who want to see the technical explanation, the details are in my article. )

 

A Helpful Way to Think About All of This