Here's an example I dealt with recently: An individual moves to Louisiana from another state. Prior to moving to Louisiana, she created and funded a Revocable Living Trust in that other state. Her goal was to avoid probate. While in that other state, she named her Revocable Living Trust as the beneficiary of her large IRA.
When she died, the custodian of the IRA said that since the Revocable Living Trust provisions required that the trust be terminated at her death, the entire IRA must be taxed to the decedent in the year of her death. Had she named her children as the beneficiaries of the IRA (instead of the trust), they could have been able to take minimum taxable distributions over their lifetime.
Moral of the story: If probate avoidance is your primary goal, name individuals as beneficiaries of IRAs and 401(k)s. They avoid probate and there won't be any question about your beneficiaries' distribution options.
Paul Rabalais
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