Deciding on whether to move 401k funds into an IRA or into a Trust fund is a tough question, and the right answer is going to be different for different people.
For purposes of this response, let's just look at the income tax implications of each. You can choose to roll over your 401k balance into a Traditional IRA, and there would be no tax impact this year - the pre-tax funds in the 401k will remain as pre-tax funds in the Traditional IRA. The money in that account will be taxable in the year(s) when distributions are taken - either by you or by your heirs.
You can also choose to roll your 401k balance into a Roth IRA, but in doing that, you will pay taxes on the entire amount rolled over in the current year. Generally speaking, in future years when you/your heirs take distributions from the Roth IRA, they would be tax free.
When you say converting the money into a Trust Fund, I think you are referring to cashing out the 401k and then moving the funds to an after-tax investment account that is owned by a Trust. In that situation, the amount cashed out will be taxable this year (and possibly subject to a 10% penalty if you don't meet the age requirements and it is considered an early distribution), and then in subsequent years the income generated in that investment account will be taxed each year the income is earned, even if there are no distributions taken.
An additional consideration to factor when deciding what is the best option for you is in is the timing of distributions - if the funds were put into an IRA and you withdraw before reaching age 59 1/2, there could be penalties for early withdrawal. Additionally, if your children inherit the IRA after your passing, there are rules that require them to withdraw a certain amount out every year, even if they would prefer to not take funds out.
As to what is the best option, the answer will not be the same for everyone. If you are looking for an overall estate planning strategy, you should consult with a local expert (such as an experienced attorney or estate planning specialist) to assess your unique financial situation and legal goals.
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