Can I Make a Life Insurance Trust Beneficiary of My 401(k)?

by Sean Mullin, studioD

Life insurance trusts prevent the IRS from collecting estate taxes on life insurance payouts. Estate taxe rates may be 55 percent or higher, so heirs occasionally must sell fixed assets to pay the tax when an estate holder dies: keeping certain funds separate from estate tax makes them available for settling those taxes without selling property or business assets (see Reference 3). You may name any trust the beneficiary of retirement accounts such as 401(k) accounts, but only designated beneficiary trusts offer efficient control through minumum distribution rules (see Reference 2).

Trust as Beneficiary

You may name any trust the beneficiary of your retirement account: naming a life insurance trust as the beneficiary combines 401(k) assets with the life insurance payout into a single account (see Reference 1). If you have an employer-sponsored 401(k), confirm that your employer allows you to name trusts as beneficiaries. Establishing a life insurance trust that becomes irrevocable upon your death ensures greater control over asset distribution than revocable trusts.

Designated Beneficiary Trust

Irrevocable life insurance trusts offer estate planners the most control over distributions from the trust because they qualify for designated beneficiary trust status. A designated beneficiary trust must be valid under state law, irrevocable at the time of the grantor's death and confirmed to benefit natural individuals instead of charities or other business entities (see Reference 1). When the life insurance trust meets these requirements, your 401(k) assets may pass directly to your heirs after the transfer to the trust.

Trust Options

You control the timing and amount of payoffs when you name a life insurance trust as the beneficiary of your retirement account. Young or financially irresponsible heirs may receive timed distributions based on their age and behavior. Second-to-die life insurance trusts guarantee that the trust will defer distributions and taxes until both spouses die and children or other beneficiaries require support.


Transferring your retirement funds to a trust after death protects investment earnings from estate taxes and encourages responsible spending by the eventual recipients. By specifying that the recipients must use the funds to pay for education or business investments, you may prevent your investments from supporting frivolous spending, drugs or gambling. Transferring 401(k) assets to a life insurance trust also increases your estate's available liquid assets, which means the recipients of the estate will have more liquid capital to pay estate taxes and settle debts with creditors.

About the Author

Sean Mullin has been creating online content since 2007. He also worked in an online writing center for college students. In addition to writing, Sean has a Master of Arts in classics and teaches Greek and Latin part-time at the college level.

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