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Do I Need a Retirement Trust?

Posted on: October 14th, 2015
Retirement assets (like IRAs, 401ks or other tax-deferred investments) need special attention when it comes to your estate plan. These types of assets often involve complex IRS rules, and for many of our clients, retirement assets are a significant part of their net worth by the time they are ready to retire. Because of this, it is important that these assets receive individualized planning.

For married couples, there is a significant advantage because the surviving spouse can simply “roll” the deceased spouse’s retirement assets into their own retirement accounts. This will continue the income tax deferral, and generally, will also continue asset protection for the retirement assets.

It gets tricky for those non-spouse beneficiaries (like grown children), though. Many clients do not integrate these special retirement assets with the rest of their estate planning objectives. First, clients need to meet with their advisors and attorney to be sure their plan has the best tax and asset protection strategy for their beneficiaries. Additionally, sons, daughters, brothers, nieces or anyone who inherits an IRA would be well advised to meet with an attorney or advisor before doing anything, otherwise they could be in for some surprises.

Understanding the Inherited IRA

Inherited IRAs are commonly recommended by advisors, but you need to be sure you fully understand this option.

The Inherited IRA allows a beneficiary to “stretch,” or continue to defer income taxes on these assets when they transfer them to the next generation, but that is just about the only real benefit. In addition, there are many negatives to an Inherited IRA.

Two key drawbacks to an Inherited IRA are:
  1. No Limit on Withdrawals – This means that all the assets in the Inherited IRA can be withdrawn at any time by the beneficiary. This also means, they can spend it all however they choose  – which is probably not what you had in mind when you left them your hard-earned money.
  2. No Asset Protection – Due to a 2014 Supreme Court ruling, an Inherited IRA does not offer asset protection against creditors. This means that if your child inherits your money, and then has business trouble, gets a divorce, develops a gambling habit, or even gets into a bad car accident, which involves a lawsuit, then all your hard-earned money could go to a third party.
Where Do Retirement Trusts Come In?

Because of the negatives involved in Inherited IRAs, there is an increasing interest in Retirement Trusts, which can also be called IRA Inheritance Trusts, Retirement Account Trusts, Trusteed IRAs, among other names. No matter what they are called, these trusts are specifically designed to receive pre-tax retirement assets, provide asset protection for the retirement assets AND continue the tax-free compounding.

Retirement Trusts are also designed to fully handle required minimum distributions (RMDs). In addition, the principal of the IRA can be protected from creditors, protected from early depletion by the beneficiary and integrated with the client’s overall estate planning objectives. For those concerned about spendthrifts or future divorces for your adult children, a Retirement Trust can provide a valuable way to segment retirement assets; continue the benefit of tax-free compounding; and provide protection for the growing assets.

As your retirement assets like IRAs and 401ks continue to grow, please take time to understand the Retirement Trust option and discuss with your attorney and advisors. It can easily be integrated with a revocable living trust, and other assets, to help you better reach your overall planning objectives.
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