Benefits of a Standalone Retirement Trust in Ohio
March 23rd, 2022
If you are at or near retirement age, you have probably spent most of your adult life putting away money in your IRA and other retirement funds. While carefully saving, you probably envisioned how you would use the money in your golden years: to travel, pursue hobbies, and generally to live comfortably and securely. You may have worried about not having enough money for retirement, but you probably thought considerably less about what would happen if your retirement assets last longer than you do. If so, it’s time to learn about standalone retirement trusts.
While you are still alive, your retirement plan provides creditor protection for the assets contained in it. But what happens to any remaining funds after you die? If you are like most people, those funds are paid to a designated beneficiary such as a spouse, child, or existing living trust. If your goal is to keep the assets out of probate, that’s good enough. But if you’re concerned about protecting your assets for your loved ones, a standalone retirement trust could be an essential part of your estate plan.
What is a Standalone Retirement Trust?
As the name suggests, a standalone retirement trust is created for one purpose: to serve as the beneficiary for certain unspent funds when the owner of an IRA, 401(k), or other tax-qualified retirement asset dies. Rather than the money going directly to children or grandchildren, it would go to the standalone retirement trust. Your heirs would be “designated beneficiaries” of the trust after you and your spouse pass away.
Why should you have a separate retirement trust? Why not make your existing living trust the beneficiary, or just let your heirs have the money? Because doing so could risk the nest egg you spent decades working for.
Five Advantages of a Standalone Retirement Trust
Prevent Your Heirs From Burning Through Their Inheritance
You worked hard for the money in your retirement accounts, perhaps denying yourself things you wanted in the moment so that you could save more money for the future. How would you feel, then, if immature or spendthrift heirs burned through that money with little consideration for the effort that went into accumulating it?
Even if you feel that the money is theirs to do with as they wish, you would probably prefer the funds to really benefit them: provide an education, buy a house, offer a more secure future. A retirement trust overseen by a trustee of your choosing can distribute funds to your heirs according to your terms that are spelled out in the trust.
Protect Your Heirs’ Assets From Their Creditors
Maybe you don’t worry about your children or grandchildren spending irresponsibly. But even the most careful and diligent person can still require creditor protection. For instance, your adult son could doze off at the wheel on his way home from a late shift at work, drifting into oncoming traffic and hitting a car containing a young family, killing everyone inside. If your son’s liability exceeds the limits of his auto insurance policy, his personal assets (including the inherited retirement funds) are vulnerable.
If that scenario seems unlikely to you, consider a far more common one: divorce. If your daughter inherits your retirement assets outright and commingles those funds with marital funds — say, by putting them in the joint bank account that belongs to her and her spouse — the spouse could walk away with half of those funds in the event of a divorce.
Keep Children From a Previous Marriage From Being Disinherited
What if you, yourself, have been divorced, and you have children from your previous marriage? If you have remarried, a standalone retirement trust could protect those children from being disinherited by your current spouse — intentionally or unintentionally.
If you name your spouse as the primary beneficiary of your retirement account, as most people do, the account funds become your spouse’s at your death. Naming your children as backup beneficiaries does not guarantee that they get the funds when your spouse dies. Instead, you can create a standalone retirement trust and make your current spouse the lifetime beneficiary, with the remainder passing to your adult children when your spouse dies.
Prevent Heirs With Special Needs From Losing Benefits
If you have a child or grandchild with special needs, you will have to give extra thought to their inheritance. Many individuals with special needs are dependent on means-tested government benefits. Inheriting money outright can make them suddenly ineligible for needed benefits. In order to qualify for benefits again in the future, they may have to “spend down” inherited funds first.
By creating a standalone retirement trust, you can ensure that any distributions to or for a loved one with special needs does not jeopardize their benefits.
Allow the “Stretching” of IRA Distributions
Prior to the SECURE Act of 2019, a beneficiary of an inherited IRA could “stretch” the IRA distributions over their own lifetime. The Act changed that by requiring inherited IRAs and other tax-qualified retirement accounts to be liquidated in 10 years or less.
However, if you create a standalone retirement trust, distributions from an inherited IRA maximizes the ability to stretch distributions well beyond the 10 year limit if the account is inherited by an individual. That, in turn, maximizes the ability for the assets to grow tax-deferred, and minimizes annual income tax burdens.
Standalone retirement trusts have many benefits, but they are not right for everyone or in every situation. If you would like to learn more about protecting your assets for your loved ones, please contact Gudorf Law Group to schedule a consultation.