Pension Funds and Estate Planning: What Families Need to Know

Headlines about underfunded public plans, corporate pension “de-risking,” and employers off-loading obligations to annuity carriers have pushed retirement security back into the news. Yet in real-life planning, pensions are frequently an afterthought. If you assume they transfer as cleanly as a bank account, you may be in for surprises. Who you named on the plan form, how the benefit pays out, and how the SECURE Act’s distribution rules work will ultimately determine what your family receives—and when.

How Pension Wealth Transfers (and Why It’s Not All the Same)

Start with structure. Defined benefit plans (traditional employer pensions) promise a monthly check for life, but payments usually end at death unless a survivor annuity was elected. Even then, the survivor option typically covers a spouse and doesn’t extend to children, all subject to plan terms and spousal-consent rules. Defined contribution plans (401(k), 403(b), IRA) hold an account balance that can pass to heirs, but the timing and taxes depend on the beneficiary type and distribution rules.

One critical detail trips families up: the plan’s beneficiary form generally overrides your will or trust. If the form is blank or still lists an ex-spouse, the plan administrator must pay the person on file, even if the will says otherwise (exceptions can apply for QDROs or community-property law). The Supreme Court cemented this “plan documents control” principle in Kennedy v. Plan Administrator

Another pivot point arrived with the SECURE Act. Before 2020, many non-spouse heirs could “stretch” withdrawals over a lifetime. Now, most non-spouse beneficiaries must empty inherited IRAs/defined-contribution accounts by the end of year 10. Under the final RMD regulations (Sept. 2024), if the original owner died on or after their Required Beginning Date, those beneficiaries also face annual RMDs in years 1–9—not just a single withdrawal in year 10. (Penalty relief applied through 2024; the final rules now govern distributions going forward.)

Trusts can help—but only when designed correctly. If a trust is named as beneficiary, it must qualify as a “see-through” trust to preserve favorable payout rules; otherwise, distributions may be accelerated in ways the original plan never intended.

Taxes & Common Pitfalls You Can Avoid

Most families are surprised to learn that inherited retirement distributions are typically taxable as ordinary income to the beneficiary (unless Roth conditions are met). These amounts are classic income in respect of a decedent (IRD); Pub. 590-B and Pub. 559 explain how and when beneficiaries report them. With the 10-year rule—and, in many cases, annual RMDs—taxable income can bunch up and push heirs into higher brackets if you don’t plan ahead.

For defined benefit survivors, income usually arrives as an annuity stream, which simplifies budgeting but complicates tax timing (each payment is taxable in the year received). Also remember the estate-tax layer: pension/annuity interests can be included in the gross estate under IRC §2039, even if they pay directly to a named beneficiary. Coordination between income and estate-tax planning matters.

Finally, don’t assume pensions always bypass probate. If no beneficiary is on file (or plan defaults send benefits to the estate), the asset can land in probate—inviting delays and creditor exposure. A quick beneficiary audit prevents an expensive detour.

How to Fold Pensions into a Real Estate Plan

Pensions don’t live in a vacuum. They interact with Social Security timing, life insurance, other retirement accounts, and your will or trust. The most common failure points are mismatched designations (e.g., a will leaves assets to children equally, but the plan still names an ex-spouse) and outdated trusts that no longer fit SECURE-Act distribution rules. Align the plan form with your broader intent, and—if using a trust—ensure it meets “see-through” requirements so distributions aren’t inadvertently accelerated.

Roth strategy can help, too. Where appropriate, Roth conversions during life shift taxation from heirs to the original owner, potentially preserving more value under the 10-year rule. Model the tradeoffs (tax rates now vs. likely for heirs) before you move.

Practical Steps for Families

1. Turning pensions into a legacy instead of a liability requires a few consistent habits. Start with the basics: review your beneficiary designations every year, especially after major life events such as marriage, divorce, or the birth of children. These forms override your will, so leaving them outdated can undo even the best estate plan.
2. Next, model the tax outcomes. Under the SECURE Act’s 10-year distribution rule, a child inheriting your retirement account could face a very different tax bill than a surviving spouse. Running scenarios with your advisor can help you decide whether to adjust beneficiary choices now.
3. If your plan allows, consider Roth conversions during your lifetime. This strategy moves the tax burden to you, potentially preserving more value for heirs who would otherwise inherit taxable distributions.
4. Trusts can also be useful, but only when structured correctly. A “see-through” or conduit trust that meets IRS requirements can protect heirs and preserve tax advantages. Poorly drafted trusts, on the other hand, can force accelerated withdrawals and unintended costs.
5. Finally, make sure survivor benefits are clear and documented. If your pension includes an annuity option for a spouse, put it in writing and communicate it with your family. And above all, bring both your estate attorney and financial advisor into the same conversation. Pensions straddle law and finance—coordination between the two is what turns them into a reliable part of your legacy.

Conclusion

Pensions remain one of the most powerful retirement tools, but when it comes to estate planning, they are anything but simple. Rules around taxation, beneficiary designations, and payout structures create traps for the unwary. A pension that was meant to provide security can instead generate confusion, unexpected tax bills, or even disputes among heirs.

The good news is that these risks are avoidable. With regular reviews of beneficiary forms, careful coordination between wills, trusts, and retirement accounts, and a strategy for navigating tax rules, pensions can deliver on their promise of long-term security. The difference lies in planning: treating pensions not as an afterthought, but as a central part of the legacy you leave behind.

Sources

RS
Fidelity
Journal of Accountancy
Schwab Brokerage
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