Protecting Your Assets And Your Legacy


The Basics

If you have one or more qualified retirement accounts – such as a 401(k), qualified pension, or Individual Retirement Account (IRA) – controlling and protecting your retirement assets should be an important step in your estate planning.

One of the best ways to manage qualified retirement assets is to establish a Standalone Retirement Trust (SRT) to serve as the designated beneficiary for your retirement accounts. As the name suggests, an SRT stands alone and operates separately from other trusts you may have designed, as well as from your probate estate. An SRT keeps your retirement assets separate from your other assets, and it can also have its own unique trustee and beneficiaries that are different from those named in your living trust or will.

After you pass away, the SRT will be funded with whatever money is left over in your retirement accounts at the time of your death. Once the trust is funded, your designated trustee will oversee the distribution of trust funds to whomever and in whatever manner you specifically designed.

Without an SRT in place, leftover retirement account funds will generally pass outright into the pocket of your surviving spouse or another designated heir. If not properly advised, your beneficiary could face severe tax consequences or claims from their creditors or a future ex-spouse.

What Happens to Your Retirement Assets When You Die?

Upon learning of your death, your retirement plan administrator will contact your current designated beneficiary – usually your surviving spouse or adult child – and ask how they want to receive the money left in your retirement accounts. The beneficiary will then have to choose to receive the money in one of two ways, either: (i) a one-time lump sum, or (ii) through smaller, incremental payments over time.

Often, the beneficiary does not know what option to choose or understand the potential negative consequences of their choice.For example, distribution of the entire amount of retirement proceeds at once could result in severe tax consequences to the beneficiary that will greatly reduce the total amount actually received. Additionally, if your beneficiary receives the retirement proceeds directly into their pocket, this does not provide them with any asset protection from potential creditors, predators, or a divorce.

Setting up an SRT prior to your death will alleviate the beneficiary from having to make an uninformed decision and allow you to protect your beneficiaries by controlling to whom, and how and when, you want your retirements proceeds distributed after your death.

Benefits of an SRT

There are two major benefits of having an SRT serve as the beneficiary of your retirement accounts as opposed to having distributions of retirement proceeds going directly to a named individual.

The first key benefit is that an SRT can provide your children and grandchildren with asset protection from potential creditors and ex-spouses. To receive this benefit, the SRT should be designed to allow the trustee to hold, and even accumulate, retirement proceeds in the trustand then make distributions to named beneficiaries on an as-need basis.

The second significant benefit of an SRT is providing your beneficiaries with the ability to apply the maximum “stretch” of Required Minimum Distributions (RMDs) for the purpose of income tax deferral and wealth accumulation. This benefit allows the beneficiary to pay the income tax on their received funds over a longer period of time, rather than immediately if they chose the one-time lump sum distribution. Moreover, this option allows the principal amount of the retirement funds to grow quicker and minimizes the immediate tax burden on the beneficiary.

Other benefits of an SRT include:
- Protection with respect to receipt of government needs-based benefits (such as Medicaid, social security, and supplemental security income (SSI));
- Alleviates the need for a court-appointed guardian for minor beneficiaries;
- Source of inheritance to children from a prior marriage;
- Asset protection in the event a named beneficiary becomes incapacitated;
- Allows for designation of more than one beneficiary; and
- Allows generation-skipping benefits for benefit of future generations

The IRS has strict requirements for creating a standalone retirement and this task should not be undertaken without the assistance of an estate planning lawyer.

Therefore, if you are looking to design a standalone retirement trust as part of your family estate planning, contact me today to learn more.