Most people are shocked to learn that after they pass, creditors can seize the retirement accounts intended for their loved ones. During your lifetime, your retirement funds have fairly comprehensive asset protection, meaning they cannot be taken in a lawsuit. Unfortunately, as soon as retirement accounts are inherited, the protection evaporates in most states. This means your hard-earned money can legally be snatched by your beneficiaries’ creditors and the courts.
As estate planning attorneys, we constantly look for ways to protect our clients, their loved ones, and their money and property. We suggest a conversation about your retirement accounts so that together we can determine whether a retirement trust make a sense for you and your family.
What Is a Standalone Retirement Trust and Why Might It Be Good for You?
A Standalone Retirement Trust (“SRT”) is a special type of trust designed to be the beneficiary of your qualified retirement accounts such as IRAs, 401(k)s, etc. During your lifetime, your ownership of and access to the accounts do not change. Upon your death, as long as you have properly named the SRT as the beneficiary on the appropriate beneficiary designation form, the trust will become the beneficiary, and the trustee of the trust will be in charge of withdrawing and managing the money received from the inherited retirement account according to the terms laid out in the trust document.
The SRT is a popular planning tool because it:
- protects inherited retirement accounts from beneficiaries’ creditors as well as predators and lawsuits
- ensures retirement accounts go to whom you designate—and nobody else;
- allows for experienced management and oversight of funds by a professional trustee;
- protects beneficiaries from reckless spending;
- enables proper planning for a special needs beneficiary;
- permits you to name minor beneficiaries as immediate beneficiaries without court-supervised guardianship; and
- facilitates generation-skipping transfer tax planning.
Divorce Creditor—A Common Example
Many parents are concerned that their in-laws may someday become the outlaws—that is, that their children may get divorced, and their children’s inherited money and property will be seized by a divorcing spouse.
Here is the story of Mary and John. Which outcome would you prefer for your children?
Option 1: Mary and John love their son-in-law, James, and they want James’ marriage to their daughter Beth to last. They gave Beth her share of their retirement plans outright at their deaths. Five years later, Beth and James divorce, and James received 50 percent of Beth’s inherited retirement funds.
Option 2: Mary and John love their son-in-law, James, but they recognize that 50 percent of marriages end in divorce. So, when Mary and John did their estate planning, they ensured their children’s inheritances could not be taken by any creditor, including a former spouse. Instead of outright distributions, they passed their retirement plans in trust. Five years later, when Beth and James divorced, James was not able to take any of Beth’s inheritance. Beth was able to use the funds in the trust to create a new beginning for herself and her children too.
If you already have an SRT, Now Is the Time to Review It
Depending on the size of your retirement account or your specific family dynamics, you may have already addressed these concerns by having an SRT house your retirement accounts at your death. However, in light of the SECURE Act, which became law January 1, 2020, it would be wise to review the distribution instructions that were included in the SRT. An SRT is typically designed using either “conduit” or “accumulation” provisions. Under the old law, if the SRT had conduit provisions, the trustee would typically withdraw the required minimum distribution (RMD) from the inherited retirement account on behalf of the trust beneficiary and would then be required to immediately give that money to the trust beneficiary. The benefit of this type of provision was that it guaranteed that the ultimate beneficiary was only receiving the bare minimum amount and would stretch the withdrawals from the inherited retirement account over the beneficiary’s lifetime.
However, because the SECURE Act eliminated the lifetime stretch for most beneficiaries (except some limited exceptions ), the conduit provisions may cause some unintended consequences. Now, most beneficiaries are required to withdraw the entire balance of the inherited retirement account by the end of the tenth year following the plan participant’s death. Therefore, a trust with conduit provisions requires the trustee to distribute the entire account balance to the trust beneficiary within ten years of the account owner’s death, unless the beneficiary is an eligible designated beneficiary. While this means that your ultimate beneficiary cannot cash out the inherited retirement account immediately, the entire balance will be given to your beneficiary ten years after your death. If ten years is too soon for your beneficiary, it may be wise to consider changing your SRT to include accumulation provisions instead. With accumulation provisions, the trustee can take any required distributions from the inherited retirement account and continue to hold them in a protected trust account for your beneficiary, making distributions according to the instructions you provide in the trust.
If you want to know more about protecting your retirement accounts contact Cox Law Group today to schedule a consultation. While every situation is different, we can help you determine if an SRT is right for you. We are available for in-person and virtual appointments, whichever works best for you.
 The SECURE Act outlines five classes of beneficiaries, referred to as eligible designated beneficiaries, (“EDBs”) who are not limited to the ten-year withdrawal rule. These include spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the age of majority, disabled individuals, and chronically ill individuals.