For many Americans, the majority of our wealth is held in retirement accounts. When it comes to inheritance and estate planning, special considerations are necessary to ensure that these assets are protected and distributed according to your wishes. It is critical to have knowledge of all the options available for retirement asset transfer, in order to best serve your needs.
Typically, retirement assets, such as IRAs, are passed via beneficiary designation. For example, for a married couple with children, it would be common to designate the spouse as primary beneficiary and children as secondary. In certain scenarios, however, it is advantageous to name a trust—rather than a particular individual—as the designated beneficiary. Once the retirement account becomes inherited by a non-spouse beneficiary (i.e. children), the IRS treats this inherited retirement account differently.
Specifically, once inherited, the beneficiary is obligated to begin taking required minimum distributions (RMD) from such funds within a more immediate time horizon of either five years or over the beneficiary’s life expectancy (known as the “stretch”). The goal in planning for inheriting retirement assets is to maximize the stretch so that the tax-deferred, long-term growth benefits of retirement accounts are maximized. Trusts can serve as an appropriate conduit to protect and preserve these assets.
Not all trusts are created equal, and naming a living trust as the beneficiary of these accounts may have drawbacks, including a more fixed distribution schedule and the lack of creditor protection. Even worse, the IRS may allow the stretch, resulting in the assets becoming immediately, taxable income. Enter the standalone retirement trust (SRT).
The SRT is a specific type of trust that, upon the death of the retirement account holder, is designed to allow retirement assets to grow tax-deferred while also protecting the inheritance from future creditors of the beneficiary. Thus, when considering an SRT, we should keep three main goals in mind:
1) We want to “maximize the stretch” and allow for the tax deferral that retirement accounts provide. The primary benefit of these accounts is that they can grow tax-free. When these assets are transferred from to a beneficiary, special planning is needed to preserve this tax-deferred status. Otherwise, assets will be liable to taxes upon transfer and remove the primary growth benefit of such savings.
2) We want to provide creditor protection. In light of the recent Supreme Court case, Clark v Rameker (2014), inherited assets are not shielded from creditor claims in bankruptcy proceedings. Rather, they may be treated as income and assets of the beneficiary, and thus, may be claimed by creditor. To protect such retirement assets from creditors, SRTs provide a wall of separation between trust assets and a beneficiary’s creditors.
3) We want to provide structure for how retirement funds may be used. Naming a beneficiary directly limits this structured distribution option, as the beneficiary will have full rights over and access to the funds, inheriting them as income. If one names a trust as beneficiary, the trust can contain stipulations concerning disbursements.
Anyone who has a retirement account should be aware of the benefits of SRTs. The standalone retirement trust can have a large, foundational role in your estate plan —along with will, revocable living trust, power of attorney, and health care documents.
We are here for you, in whatever way you choose to address this sensitive subject with your family, remember that we are here to help, from a full review of your estate plan to offering guidance on how to include your loved ones in a family vision for your estate. When you’re ready, call our estate planning lawyers for an appointment to discuss your needs.
