Benefits for Large Retirement Accounts

I recently had a call with Vincent, a retired physician, who was absolutely devastated. He’d meticulously updated his estate plan five years ago, including a codicil to his Living Trust specifically addressing his substantial 401(k). Unfortunately, the codicil wasn’t properly executed – a single missing witness signature rendered it invalid. The result? His family faced an estimated $75,000 in unnecessary probate costs, and months of agonizing delays accessing funds meant to secure his wife’s future. This is a shockingly common scenario, and one we work tirelessly to prevent.

What Happens to Retirement Accounts After You’re Gone?

Many of my clients, particularly those with significant retirement savings, assume their Living Trust automatically covers everything. That’s often not the case. While a properly funded Living Trust avoids probate for most assets, retirement accounts – 401(k)s, IRAs, pension plans – require specific beneficiary designations. These designations supersede whatever instructions are in your trust. Ignoring this is the single biggest mistake I see, especially with accounts exceeding $1 million.

As an attorney and CPA with over 35 years of experience, I bring a unique perspective to estate planning. Most advisors understand the legal side, but few grasp the tax implications of transferring (or failing to transfer) these assets. Maximizing the “step-up in basis” for inherited retirement accounts is crucial for minimizing capital gains taxes for your beneficiaries. This is where my CPA background is invaluable.

How Does a Trust Affect My Retirement Account Beneficiaries?

Naming your trust as the beneficiary of your retirement account offers several key advantages. It allows for continued tax-deferred growth, professional asset management, and creditor protection for your heirs. However, it’s not a simple “check the box” exercise. The trust language must be drafted precisely to comply with IRS regulations and avoid triggering immediate taxation. This is especially true now, with the evolving rules surrounding the SECURE 2.0 Act.

What About the SECURE 2.0 Act and Beneficiary Rules?

The SECURE 2.0 Act significantly changed the rules for non-spouse beneficiaries inheriting retirement accounts. Previously, they often faced a 10-year rule, requiring them to deplete the account within that timeframe. Now, there are more exceptions, particularly for certain beneficiaries like minor children or those with disabilities. Understanding these nuances is critical for tailoring a strategy that aligns with your family’s specific needs and minimizes tax liabilities.

Furthermore, the OBBBA (One Big Beautiful Bill Act) permanently set the Federal Estate Tax Exemption to $15 million per person, effective Jan 1, 2026, meaning the primary focus of most Living Trusts is now avoiding probate and protecting privacy, rather than minimizing federal taxes. However, avoiding unnecessary income taxes on inherited retirement funds remains a top priority.

Protecting Digital Assets Within Retirement Accounts

Don’t overlook digital assets! Many retirement accounts are now accessed online, and include digital investments like cryptocurrency. Without specific RUFADAA language (Probate Code § 870) in your trust, service providers like Apple, Google, and Coinbase can legally deny your successor trustee access to these funds. This requires proactive planning and incorporating specific digital asset provisions into your estate plan.

What If I Forget to Update My Beneficiary Designations?

This is where we deploy a “safety net” strategy. Let’s say, for example, a primary residence intended for the trust was accidentally left out of the trust funding. For deaths on or after April 1, 2025, if that home is valued up to $750,000, it qualifies for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). It’s important to distinguish this is a “Petition” (requiring a Judge’s Order), NOT an “Affidavit.” This provides a streamlined path to transfer the property, but it’s still best to avoid the situation altogether through proper trust funding.

Remember, signing the trust document is only step one—you must legally transfer assets (funding) to the trustee for the trust to exist, as stipulated under California Probate Code § 15200.

Can I Change My Trust After It’s Created?

Absolutely. Unless the trust instrument expressly states otherwise, Probate Code § 15400 presumes that all California trusts are revocable, allowing you to amend, revoke, or restate the trust at any time while you have capacity. Regular review and updates are essential to reflect changes in your assets, family circumstances, and tax laws. And while transferring your home into your revocable trust does not trigger reassessment, the eventual distribution to your children will trigger a Prop 19 reassessment to current market value unless the child moves in as their primary residence within one year.

• Label: Ensure your trust is properly funded with all relevant assets.
• Label: Regularly review and update your beneficiary designations on all retirement accounts.
• Label: Incorporate RUFADAA language for digital assets.
• Label: Consult with a qualified attorney and CPA to tailor a strategy to your specific circumstances.

What determines whether a California trust settlement remains private or erupts into public litigation?

The advantage of a California trust is control and continuity, but this relies entirely on accurate funding and disciplined administration. Without clear asset titles and strict adherence to fiduciary standards, a private trust can quickly become a subject of public litigation over mismanagement, capacity, or undue influence.

To prevent family friction during administration, trustees must adhere to the rules in administering a California trust, while beneficiaries should monitor actions to prevent the issues highlighted in common trust pitfalls, ensuring the trusts is enforced correctly.

A stable trust administration relies on the trustee’s ability to balance investment duties, beneficiary communication, and tax compliance. When these elements are managed proactively, families can avoid the emotional and financial drain of litigation.

Verified Authority on California Trust Law

• Trust Validity (Probate Code § 15200): California Probate Code § 15200
  The foundational statute confirming that a trust requires property to be valid. This is the legal basis for the “funding” requirement—without transferring assets (deeds, accounts) into the trust, the document is legally empty.
• Revocability Presumption (Probate Code § 15400): California Probate Code § 15400
  Confirms that California trusts are presumed revocable unless stated otherwise. This grants the settlor the flexibility to change beneficiaries, trustees, or terms as life circumstances evolve.
• Primary Residence Succession (AB 2016): California Probate Code § 13151 (Petition for Succession)
  Effective April 1, 2025, this statute acts as a backup for funding errors. If a home (up to $750,000) is left out of the trust, this Petition avoids a full probate administration.
• Property Tax Reassessment (Prop 19): California State Board of Equalization (Prop 19)
  Essential for all trust creators. While the trust avoids probate, it does not automatically avoid property tax increases for heirs. Specific planning is required to navigate the “primary residence” requirement for children.
• Estate Tax Exemption (OBBBA): IRS Estate Tax Guidelines
  Reflects the OBBBA permanent increase to a $15 million per person exemption (effective Jan 1, 2026). This shifts the planning focus for most Californians from tax avoidance to asset protection and probate avoidance.
• Digital Asset Access (RUFADAA): California Probate Code § 870 (RUFADAA)
  Without this statutory authority included in your trust, your digital legacy (crypto, social media, cloud storage) may be permanently locked away from your family by service providers.