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Retirement accounts continue to grow as a large share of clients’ wealth. (See our previous blog post on this topic here.) As a result, it is increasingly important for clients to really understand their estate planning options for passing this growing nest egg of retirement accounts to the next generation. Complicated IRS rules, along with the threat of changing tax laws, has made this topic increasingly more confusing to many clients, advisors, attorneys and CPAs, so there is also growing frustration. For many clients, the Retirement Trust provides a new, comprehensive solution to continue deferring income taxes and to provide asset protection for their beneficiaries.

Other than leaving an IRA directly to your spouse, the most common non-spouse IRA beneficiaries are typically the owner’s descendants (children). In this example, the IRA owner names the children individually and their corresponding share of the IRA. For years the financial industry has promoted the resulting “Inherited IRA,” and the most important value to the beneficiary is to defer income taxes on this inheritance. This ability to “stretch the IRA” provides significant financial benefit for most beneficiaries.

An often-overlooked weakness of the Inherited IRA is its lack of asset protection. In 2014 the United States Supreme Court held in Clark v. Rameker, 573 U.S. (2014), that funds in an inherited IRA are not considered “retirement funds,” and so these funds are not exempt from an individual’s bankruptcy estate. As a result, the inherited IRA is available to creditors like any other non-retirement asset. So an inherited IRA can defer income taxes for the beneficiary, but an inherited IRA is not a protected asset for the beneficiary. This means this part of a client’s nest egg is all available to creditors, broken marriages, law suits, predators and other demands. For clients with large retirement accounts, this risk is a growing concern.

Enter the Retirement Trust as an option to consider. The Retirement Trust provides a beneficiary all the financial benefits of the inherited IRA PLUS it can protect the nest egg for the next generation. This additional asset protection benefit can have significant value for the high-net worth client who has a large share of their assets in their retirement accounts. The Retirement Trust is specifically designed to receive retirement assets, the terms of the trust have been customized to the IRS rules governing these accounts and these larger retirement accounts can be available to beneficiaries on the trust terms, but also protected from predators.

As clients work through their estate planning options it is increasingly important for them to understand how retirement assets will pass to the next generation. For some clients, the simple inherited IRA meets their needs. For others, especially clients with large retirement accounts, the Retirement Trust offers the best solution as it combines all the benefits of the inherited IRA with an asset protection level for the beneficiary. Additionally, the Retirement Trust has multiple design options providing much more flexibility for managing the specific interests of a client and their descendants.

We encourage all clients, especially those with larger retirement accounts, to fully understand their alternatives and to choose wisely for their beneficiaries and loved ones. Ask us for a no-cost review of your current situation, and we will be glad to provide you with a comprehensive review. Just give us a call at 913-345-2323. We’ll be happy to speak with you!