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LJN NewslettersNewsSectionsThe Matrimonial Strategist

Leaving Retirement Plan Benefits to Trusts

BY Ellen Schiffer Berkowitz
April 27, 2007

As the baby boomer generation ages, a greater and greater concentration of wealth is being held in retirement plan benefits. Dealing with the complexities of retirement plan benefits, whether it be via a prenuptial agreement or a divorce settlement, is unavoidable. An inadequate understanding of how these plans work can make a significant difference in your client's tax bill. For example, it may make perfect sense, for a variety of non-tax reasons, to make one spouse's retirement plan benefit payable to a trust for the benefit of the surviving spouse. However, such an arrangement may come at the price of significant income tax costs. While it is important to understand and be sensitive to the multitude of factors motivating an individual to leave assets in trust, it is just as important to understand the income tax consequences of this choice.

Leaving Benefits Outright To a Spouse

If one spouse leaves retirement plan benefits outright to the surviving spouse, the surviving spouse can then rollover the benefits into his or her own retirement plan. From a tax perspective, the rollover is extremely powerful and is a great gift from the Internal Revenue Service. However, if one spouse leaves retirement plan benefits in trust for the benefit of the surviving spouse, the surviving spouse cannot rollover those benefits unless he or she has the complete right to withdraw all of the assets held in the trust. Such a provision usually defeats the purpose of creating the trust in the first place. Further, a standard qualified terminable interest trust would not include such a provision and would therefore not qualify for the rollover.

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