Retirement Plan Inheritance Trusts
Maintain control over your retirement assets and protect your family.
What is a Retirement Plan Inheritance Trust?
A Retirement Plan Inheritance Trust (“Retirement Plan Trust”) is a special type of trust created to make sure your children don’t spend all your hard-earned retirement money (IRAs, 401(k)s, 403(b)s, etc.) within a year or two of your death.
A Retirement Plan Trust may be appropriate when the bulk of your assets are in retirement plans. You can provide a steady stream of income over the life of your beneficiaries – or allow your trust to accumulate the income and distribute to your beneficiaries as you choose.
A Retirement Trust can help prevent disinheritances of your children in second-marriage situations or when your spouse remarries. You name the ultimate beneficiaries.
Your Retirement Trust mandates the distribution choices you made – your beneficiaries can’t change them. And you’re not locked into a specific Trustee – you can choose an individual or an institution, and you can change them as desired. This provides more control and protection than other distribution planning techniques.
You May Benefit from a Retirement Plan Inheritance Trust if You Want to…
- Protect your children from accidental disinheritance if your spouse remarries
- Provide for a second spouse during his or her lifetime, with the remainder going to your children
- Provide for a beneficiary with special needs
- Provide for a beneficiary without disqualifying him or her from receiving much-needed public assistance
- Protect spendthrift children from creditors
- Ensure that your children will have retirement income
- Ensure that the bulk of your assets remains in your family – not in the pockets of a child’s ex-spouse
- Provide different levels of access to income and principal to different children
- and more…
Retirement Plan Inheritance Trust Alternatives
The SECURE Act of 2020 changed the IRA landscape for non-spouse beneficiaries – Stretch IRAs were eliminated. While surviving spouses and certain disabled beneficiaries can still take Required Minimum Distributions (RMDs) over their lifetime, thereby stretching out the tax burden, your children no longer can. They must liquidate the account within 10 years; the IRS wants its cut as quickly as possible. So, your children can take it all out on Day 1, or on the day before the 10 years is up, or any other way they want, as long as it’s all gone within 10 years. In my experience as a financial advisor, I generally saw children liquidate their parents’ IRAs within 3 years; it’s “found money” to them so they don’t care about paying the taxes.
- Offered by some Trust Companies -essentially a boilerplate Retirement Plan Trust with few customizations
- Generally, high balance requirements
- Your financial assets are taken from your trusted financial advisor and placed with the Trust Company.
- Effective immediately – not just at death or disability
- You’re locked into that Trust Company for the life of the trust
Drawbacks to Using a Retirement Plan Trust
- A trust created by a knowledgeable attorney costs more than a simple Will.
- Trusts are taxed at compressed income tax rates, which means that, when compared with the tax rate of an average middle-class person, a trust will generally pay a higher tax rate on a smaller amount of income.