Retirement Trust

A Retirement Trust protects your funds and your beneficiaries.

If your children or other beneficiaries stand to inherit your IRA, you should consider a Retirement Trust. A 2014 U.S. Supreme Court decision ruled that when IRA accounts are inherited by someone other than the account holder’s spouse, they lose their status as retirement funds and may be tapped into by the beneficiary’s creditors to resolve debt. This could not only affect the beneficiary’s access to the funds, but also require him or her to pay income tax on the withdrawals.

A Retirement Trust provides protection for your retirement fund and your beneficiaries. This type of trust is created separately from your revocable living trust and serves as a protective conduit for those you wish to inherit your account. If you are married, you can still name your spouse as the primary beneficiary, but instead of naming your children, or another individual, as the secondary beneficiary of the IRA, you would name your Retirement Trust. The person you would like to inherit your IRA would be designated as the beneficiary on the Trust. Upon the death of you and your spouse, the Trust would then receive the proceeds of your IRAs, providing access to the funds as well as asset protection for your beneficiaries. This prevents creditors from touching the money.

An IRA Trust is an excellent way to protect your adult children’s access to your hard-earned funds. It’s also a solid solution for passing an IRA account on to minor children. There are many complex issues when minor children inherit IRA accounts. A Retirement Trust can eliminate those issues.

How Does A Retirement Trust Work?

The trustee of your Retirement Trust controls withdrawals from the IRA. The trustee can also be the beneficiary of your Retirement Trust.

The terms of this type of trust specify that the trustee must withdraw the minimum amount required by law from the IRA. They can also specify that this amount may be exceeded for an emergency, such as health or educational needs.

Once the funds are withdrawn from the IRA and placed in the Retirement Trust, the proceeds are either distributed outright to the beneficiaries or held in the Trust until the trustee disburses them in accordance with your directions.

A Retirement Trust provides all of the benefits of “stretching” the distribution from the IRA over the life expectancy of each beneficiary. You can also place restrictions in the Retirement Trust to ensure that the beneficiaries will not prematurely withdraw the funds.

Can’t I Use My Living Trust as the Beneficiary of My IRA?

As a general rule, we don’t recommend that you name a traditional Living Trust as the beneficiary of your retirement accounts. Nor should your Living Trust be named as the beneficiary of your Retirement Trust.

Even though the Living Trust may have specific language regarding the disposition of the estate, a traditional Living Trust does not contain the necessary provision to address the income tax and asset protection issues unique to the retirement accounts. The designated beneficiaries of your Retirement Trust should be the individuals to whom you want the proceeds from your retirement account to be given.

In addition to having the Retirement Trust drafted correctly by an attorney qualified to do so, it is also necessary that the beneficiary designation be completed correctly and filed with the custodian.

Creating a Retirement Trust and designating a beneficiary of a retirement is complicated and can cause serious tax consequences if not done correctly. Contact our office at (800) 698-6918.

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