Why do I like Retirement Trusts best of all beneficiaries for retirement assets? Because unlike any other beneficiary, with an Irrevocable Retirement Trust, we can achieve every objective clients have for their estate planning. (Although the trust has to be irrevocable — according to one case in Kansas — it’s easy to replace it with a new trust as long as the plan participant is alive and well.)
We can achieve estate tax planning goals by keeping the first spouse’s retirement assets out of the second spouse’s taxable estate; especially valuable if the retirement plan is a substantial portion of the estate. This is applying the A-B formula that allows married couples to double the amount they can pass on to beneficiaries free of estate tax to retirement assets.
We can maximize the income-tax deferral benefits of the retirement asset by ensuring that the stretch-out is fully utilized. (That means that your beneficiaries can withdraw and pay tax on the retirement plan over the course of their entire lives, rather than all at once. If they have to withdraw it all right away, it may put them in a higher tax bracket so that they have to pay very high income tax rates on the inheritance. Imagine a $1M IRA reduced to $650k through income taxes. Imagine the beneficiary finding out that it was avoidable…)
We can provide asset protection, divorce protection, remarriage protection and disinheritance protection to all beneficiaries, from the spouse to the grandchildren. Unlike in an RLT’s conduit trust provisions (at our firm, a standard clause we include that, in some cases, allows a stretch-out), a Retirement Trust can contain Accumulation Trust provisions that allow the trustee to accumulate required minimum distributions inside of the trust instead of distributing them to the beneficiary each year. This allows true protection because there is no right to attach or take away.
Two cases (one from Delaware – a powerful state), have recently held that an inherited retirement plan has NO asset protection on its own. Listen, while you own your own retirement plan, you get great asset protection, especially if that retirement plan is under ERISA — 401(k)s, 403(b)s, etc. If you get sued or go bankrupt, your entire 401(k) is protected (the protection for contributory IRAs is limited; comment below if you want details), no matter how big it is. Your beneficiaries don’t get this protection.
Finally, we can ensure the asset is never accidentally probated. You may wonder how it could ever be probated. All it takes is for the primary beneficiary to fail to complete her own beneficiary designation form. Or the custodian could lose the designation form. Or you could name a minor child as a beneficiary. Lots of paths to probate.
The Irrevocable Retirement Trust is an estate planner’s dream for her clients! DEFINITELY consider it if your retirement assets make up more than 20% of your total estate or exceed $300k.
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