Retirement assets take a lifetime to build, but they can be spent rather quickly by those who inherit them. An individual retirement account (IRA) is a perfect example. After decades of working, saving and investing, a retired account holder may leave unspent IRA funds as an inheritance to his or her loved ones.
Leaving liquid assets to financially immature individuals, however, can lead to frivolous spending instead of a head-start on education funding and wealth creation. What’s more, inherited tax-advantaged retirement accounts lose their retirement protections, making the funds fair game for creditors.
A Standalone Retirement Trust provides a solution. A Standalone Retirement Trust is a trust that is created for the sole purpose of serving as the beneficiary of unspent tax-qualified retirement investments, such as an IRA, 401k or similar assets, when you pass away.
Instead of leaving unspent funds directly to non-spousal beneficiaries, remaining monies would go to a Standalone Retirement Trust and your desired heirs would be the designated beneficiaries of the trust. You also would need to select a trustee for the Standalone Retirement Trust, who may oversee the distribution of funds to the beneficiaries according to your wishes. After you and your spouse pass away, if applicable, any remaining retirement account proceeds can fund the trust. One advantage is then the trust can both protect the asset and your beneficiaries from creditors pursuing any beneficiary debts. They’ll also be protected from increased income tax exposure and exceeding income limits for government benefits if they have special needs.
Keep in mind that the trustee must withdraw the minimum amount of annual distributions required for an IRA or other inherited tax-advantaged retirement asset. A Standalone Retirement Trust, however, can provide the benefit of “stretching” inherited IRA distributions over a beneficiary’s lifetime, which allows for continued tax-deferred growth of the asset and reduced annual income tax liabilities. This can make Standalone Retirement Trusts a desirable alternative to new congressional changes contained in the SECURE Act of 2019 that now require inherited tax-qualified retirement accounts to be liquidated in 10 years or less.
We know this article may raise more questions than it answers and want to help you get the advice you need. Do not wait to contact an experienced estate planning attorney in our law firm if you or someone you know would like more information about Standalone Retirement Trusts and how they may benefit your estate planning goals.