If my IRA or 401(k) tax-deferred money is transferred upon my death to a marital bypass trust -- a trust to decrease the estate tax that eventually has to be paid by my children -- does income tax on the amount transferred become due immediately or can the money continue to accumulate, tax deferred, until withdrawn from the trust?

No one can avoid Uncle Sam forever -- although you can delay his visit upon you and yours by setting up a trust such as the one you describe. (To learn more about estate-tax reducing trusts, see Tax-Saving AB Trusts.)

Distributions from a tax-deferred retirement plan, such as an IRA or 401(k) plan, are taxable in the year of the distribution. As long as the assets remain in the plan, however, they remain tax deferred. That is the basic rule.

When a trust is named beneficiary of a retirement plan, it does not mean the assets of the retirement plan are all distributed to the trust when you die. It means that whenever the assets do come out of the plan, they must go into your trust. Retirement plans themselves cannot be transferred into a trust; those assets must be distributed from the plan first, which triggers income tax on the distribution.

If you are older than 70-1/2 when you die, money generally must come out of your retirement plan according to the schedule you established before your death. The schedule can be accelerated, but it cannot be slowed down. The distributions would then go into your bypass trust and would be subject to income tax in the year of distribution.