If you’re like most people, a considerable part of your savings is in one or more tax deferred accounts – things like 401(k), 403(b), IRA and other similar retirement accounts. The allure and benefits of these programs are tremendous:
- The contributions to these accounts are usually tax deductible,
- Your contributions are often matched, at least in party, by our employers,
- The income and capital gains earned on these accounts accumulates income tax free until much later in time, and
- The process feels painless – most often an automatic deduction from our paycheck before we even see it and become attached.
And if those benefits were not enough, the government provided creditor protection for those hard-earned, diligently banked retirement funds… Win-win-win! That is until a recent US Supreme Court decision[i] that held that creditor protection will not apply to inherited tax deferred accounts.
If you’re thinking of leaving your IRA to your children or grandchildren you need to be aware of some pitfalls. The Supreme Court in its recent ruling found that inherited IRA’s should not be insulated from our children’s creditors in the same way as your own IRA and are therefore fair game for creditors. This is a big change in the law, causing many to rethink ways to pass retirement accounts to their children.
Since retirement accounts have outright beneficiary designations payable to a person, they can’t pass under a Will or revocable trust, where continuing trusts can protect assets for children (or other loved ones). Most people will name their spouse as the beneficiary, followed by their children in their individual names. But there’s another option that also protects retirement assets passing to heirs – creating something called a Standalone Retirement Trust.
The trust is basically an agreement that, upon your death, would control how and in what manner retirement assets would be paid to your children. Instead of naming your children as outright beneficiaries, you would name the Standalone Retirement Trust. Your children would still have access to the funds, but the funds would be held in a trust managed for their benefit. Some of the advantages are:
- Protects assets from creditors and lawsuits
- Insures that money remains in the family bloodline and out of hands of potential ex-spouse
- Allows for experienced management of money in a trust by a trustee
- Permits minor beneficiaries to be immediate beneficiaries without the need for a court appointed guardian
If you have a significant amount of your assets in a retirement plan, a Standalone Retirement Trust could be a very wise addition to your estate plan.
[i] Clark v. Rameker