Do You Need a Standalone Retirement Trust?
A question I’m often asked when it comes to estate planning is, do I get any say in how a beneficiary can use the money I leave them? Whoever inherits your retirement accounts could have a lot of freedom in how they use that money, for good or bad. At the same time, this beneficiary may have to deal with a few potentially costly drawbacks to inheriting. A standalone retirement trust is one estate planning tool that may be used to circumvent all of these issues.
Here’s a hypothetical question I might pose to a client facing this decision: Would you be okay with someday, after you’re gone, one of your heirs spending everything that was left of your retirement savings on a weekend trip to Vegas?
Sure, not every family includes a blow-thousands-in-Vegas kind of relative, but lots of people make irresponsible decisions when they inherit a significant sum of money. This is just one instance when a standalone retirement trust might be something to consider.
What is a Standalone Retirement Trust?
The primary goal of creating a standalone retirement trust is to protect any money left in an IRA or other retirement account at the time of your death. If the account owner has a spouse who inherits this money, the spouse has a certain amount of freedom in how and when they withdraw the money. But when a non-spouse beneficiary inherits such an account, they’re subject to stricter distribution rules.
The beneficiary may be required to withdraw all the money within a certain number of years of the account owner’s death. Because there are some drawbacks to this, the account owner may establish a standalone retirement trust to be the beneficiary of any remaining retirement savings. They can name a trustee and set their own terms. When they die, their SRT is funded with that money. The trustee oversees the management and distribution of the trust, in keeping with the instructions left by the decedent. The money in the standalone retirement trust remains property of the trust until it’s distributed to beneficiaries.
This kind of trust is gaining in popularity because the SECURE Act changed the rules for stretch IRAs. Before its passage, a non-spouse beneficiary was allowed to stretch their distributions over their lifetime. Now, these beneficiaries have to empty their inherited accounts within 10 years, or sometimes sooner.
Advantages of Standalone Retirement Trusts
Standalone retirement trusts provide a few key benefits.
- Protection from creditors. Assets held in an IRA or other retirement account are generally safe from most creditors, so the account owner doesn’t have to worry about these funds being seized during life. But upon the decedent’s death, those protections end and creditors may have a claim on any remaining money. Holding retirement accounts in a standalone retirement trust shields them from creditors.
- Allows the account owner to have more control. Say you elect to leave your IRA to a grandchild, who’s 18 at the time of your death. As the account beneficiary, this young adult has the option to take all the money in a lump sum. Not only is that inadvisable for tax purposes, but an immature or irresponsible beneficiary may make poor choices after inheriting a major sum of money. Setting your own terms should provide some reassurance that your hard-earned money will last. You may even opt to stretch the payouts out over the beneficiary’s lifetime.
- Extends tax deferral benefits. As soon as your beneficiary starts taking distributions from your retirement accounts, their tax liability kicks in. Without the protection of an SRT, they would be required to empty the account within a certain number of years and pay any necessary taxes at that time. Stretching distributions extends tax benefits and allows the money to grow.
Do I Need a Standalone Retirement Trust?
It can be hard to predict how useful a standalone retirement trust will end up being, but that’s true of a lot of estate plans. You could name a young and immature beneficiary now, and they may be highly responsible with money by the time they inherit. Or you may live long enough and have high enough expenses that there’s only a small amount remaining in your accounts when you die. This kind of trust is just one estate planning tool that may or may not serve a purpose in your plans. There’s no substitute for discussing your trust options with your estate planning attorney.
Whether or not a standalone retirement trust is right for you, working with an experienced attorney can help you make an informed decision. I know that estate planning can seem complicated, and I’m here to walk you through your options to protect your assets for future generations. Contact me today with questions.
Jessica Pesce specializes in estate law and elder law. She has helped countless people with their estate planning since joining Ladimer Law in 2017.