In a recent blog, we discussed the advantages of incorporating your retirement plan (i.e., pension plans, 401(k) plans, employer established IRA plans, etc.) into your overall estate plan. As we discussed, this can be a complex matter because the tax advantages which are accorded to retirement accounts are generally not extended to heirs or designated beneficiaries once the retirement account owner has died.
By way of summary, we have identified three goals you may want to consider when incorporating your retirement plan into your estate plan:
- Maximizing the “stretch period” so that the assets in the retirement account can continue their tax-free growth for the maximum length of time;
- Ensuring that the assets are shielded from the beneficiary’s creditors; and,
- Providing a structure for the distribution of the retirement funds, e.g., limiting the disbursements in order to prevent a spendthrift beneficiary from squandering his or her share of the funds in one fell swoop.
A standalone retirement trust (SRT) may be precisely what you need in order to achieve the above goals. An SRT is a separate trust specifically designed to receive your tax deferred retirement plan on your death. It should be entirely separate from any revocable living trust you may have already established as part of your estate plan. Upon your death, an SRT will allow your retirement account to continue to grow tax deferred, thus maximizing the account’s stretch period.
An SRT will also allow protection from creditors, much like an irrevocable, third party trust. This alone might be an important incentive for establishing an SRT, given that the Supreme Court has ruled that inherited assets are not shielded from creditor claims in bankruptcy proceedings. Lastly, you can instruct your trustee in the SRT instrument as to when and how the trustee is to disburse funds to your chosen beneficiaries. This allows you to structure distributions and thus protect your hard-earned retirement funds from being dissipated by a spendthrift heir.
Although retirement accounts present complex issues in estate planning, we recommend you consider how an SRT might enable you to achieve maximum benefit from your retirement benefits as part of your overall estate plan.