Most people express shock when they learn that bill collectors could seize their retirement accounts once they pass to their loved ones. During your lifetime, your retirement funds offer fairly comprehensive asset protection. This means they remain safe in lawsuits. Unfortunately, however, as soon as someone inherits a retirement account, that protection evaporates in most states. This means creditors and courts could snatch your hard-earned money from your beneficiaries.
Retirement Trust
As estate planning attorneys, we strive to protect our clients and their loved ones, as well as their money and property. For this cause, we suggest meeting to discuss whether a retirement trust makes sense for you.
Standalone Retirement Trust
A Standalone Retirement trust (SRT) is a special type of trust. SRTs serve as the beneficiary of your qualified retirement accounts such as IRAs, 401(k)s, etc. Your ownership of and access to the accounts do not change. When you die, with a properly named SRT as the beneficiary on the appropriate beneficiary designation form, the trust will become the beneficiary. The trustee of the trust will withdraw and manage the money received from the inherited retirement. We operate these accounts according to the terms laid out in the trust document.
The SRT as a Popular Planning Tool
- 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.
- Facilitates generation-skipping transfer tax planning.
Divorce Creditor—A Common Example
Many parents express concern their in-laws becoming outlaws. Their children may divorce. In this case, a divorcing spouse could seize their children’s inherited money and property.
Review Your Standalone Retirement Account
Depending on the size of your retirement account and specific family dynamics, you may have already addressed the above concerns. However, the SECURE Act passed in December 2019. Effective January 1, 2020, it dilineates distribution instructions included in the SRT. SRTs typically use either “conduit” or “accumulation” provisions. Under the old law, with SRT conduit provisions, the trustee typically withdraws the required minimum distribution (RMD). Taking money from the inherited retirement account on behalf of the trust beneficiary requires immediately giving 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.
SECURE Act
However, because the SECURE Act did away with the lifetime stretch for most beneficiaries (with some exceptions), the conduit provisions may cause some unintended consequences. Now, the law requires most beneficiaries 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 give the entire account balance to the trust beneficiary. This must be done within 10 years of the account owner’s death, unless the beneficiary is an eligible designated beneficiary.
Inherited Retirement Account
While this means that your ultimate beneficiary cannot cash out the inherited retirement account immediately, the entire balance will be given to your beneficiary in about 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.
Call Today
If you would like to know more about protecting your retirement accounts, contact us today to schedule a conversation. While every situation is different, we strive to help you determine if an SRT is right for you. We are available for in-person and virtual appointments, whichever works best for you.
About Skvarna Law in Glendora and Upland, California
Skvarna Law Firm operates offices in Glendora and Upland, California. We provide legal services. We cover San Bernardino, Los Angeles, Orange, and Riverside Counties. This includes several cities. Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Pomona, La Verne, Montclair, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma. Visit SkvarnaLaw.com to learn more.
