Even though there can be tax benefits to deferring payouts from an IRA or a 401K, sometimes this benefit is a minor benefit when compared with the risks of having the asset distributed directly to someone who may have problems handling money.

    In such cases there are a variety of ways in which the beneficiary designation can be structured.

    As outlined in another posting titled IRAs, 401Ks, and Estate Planning, taxes can be deferred, and often reduced, if the pay out period is extended for an IRA or 401k or other tax deferred asset.  This is often done by designating a specific (and younger) individual as the successor beneficiary of an IRA or 401K following the death of the original owner.

    Sometimes this is not wise, however, as the successor beneficiary may not be good with money, or may have significant outstanding debts, or may otherwise not be a good candidate.

    If tax deferral is a significant goal, it is sometimes wise to create and use certain very specialized trusts known as Accumulation Trusts or as Conduit Trusts.

    Conduit trusts and/or accumulation trusts can be relatively expensive to set up, however.  The tax savings of such a trust may be lost in the creation and maintenance of such a trust unless the amounts in the IRAs and/or 401Ks are large.

    People often spend considerable amounts of money, or follow strategies that fail to protect their money from serious known risks, simply to save what are likely fairly small possible tax costs.

    In many cases it is best to simply accept the somewhat higher tax rate that accompanies a more rapid pay out of an IRA or a 401K, and to designate one’s probate estate or non-tax qualifying trust (such as a revocable living trust).  Although there may be some tax cost to doing this, in many cases this is the most cost effective way to protect the asset from a beneficiary who is not good with money, and needs some protections.  In other cases, this is the best and most cost effective way to protect the asset from a beneficiary who may have pre-existing creditors, since these creditors might in essence receive the asset if it is given directly to the beneficiary who owes money to these creditors.

    It is unfortunate, but many people, through a concern with maximizing tax advantages, spend far greater amounts of money in the creation of overly complicated tax driven trusts than they would lose to taxes if they followed simpler strategies.  

    It is also unfortunate that a number of people, in an effort to maximize tax advantages, fail to protect their assets from beneficiaries who might spend the money rapidly and unwisely, or who might lose the money to existing creditors, when a simple non-tax driven trust might provide protections that far outweigh the tax advantages of more complex strategies.

    As with most estate planning issues, discussing the matter with a skilled and practical lawyer can be very helpful in choosing the most efficient path to follow.