Another major problem with listing children or grandchildren as the contingent beneficiary on your retirement accounts is the lack of creditor protection. If the beneficiary has full control over the inherited account, they do not receive the same creditor protections that the original plan participant received during his or her lifetime. What this means practically is that the account could be subject to the child or grandchild’s creditors, predators, lawsuits or even a divorcing spouse.

So how do we solve this problem to properly protect your children and grandchildren? This can be accomplished by designating a special type of trust as the contingent beneficiary of your retirement accounts. This specially crafted trust is called a Retirement Protector Trust™. Your children or grandchildren can be the beneficiaries of this powerful trust. There are three major benefits of this trust. They are: (1) creditor protection for your children; (2) a longer deferral period for your retirement accounts, which will create more wealth for your children; and (3) the ability to craft back-up beneficiary designations should any of your trust beneficiaries die before complete distribution of their share of the retirement accounts. Now let’s discuss each of these benefits in further detail.

First, let’s discuss the creditor protection this trust can provide to the trust beneficiaries. We typically draft the trust with the trustee having the ability to accumulate a beneficiary’s share of the required minimum distribution inside the trust in a sub-trust specially designed just for that particular beneficiary. The power of this is that if the beneficiary is going through divorce, a lawsuit or some other creditor problem, the trustee can hold that beneficiary’s required minimum distribution in their separate sub-trust until the creditor problem has been resolved. In this way we can preserve and protect the money for that beneficiary. Also, if the beneficiary is younger or financially immature, it may not be wise to distribute the required minimum distribution directly to that beneficiary. This could be particularly so if the retirement account is large and thus the RMD is large on an annual basis. The required minimum distribution (also known as an RMD) is the amount that must come out of the inherited retirement account annually and deposited in an account owned by the trust.

To provide an example, let’s examine the case of Dr. Bob and his wife Elise. Bob and Elise are in their 40s and have three children. Taylor is 14, John is 12, and Alexis is 10. Dr. Bob has a defined benefits plan from his doctor’s practice with a balance of $1.1 million. He also has an IRA with a balance of $350,000. Before Dr. Bob and his wife consulted with us, he had a revocable trust owning his home, a vacation home, a rental property, several bank accounts, and a brokerage account. His life Insurance is owned by an irrevocable life insurance trust and his retirement accounts listed his wife as the primary beneficiary. When Dr. Bob set up the beneficiary designations on his defined benefits plan and IRA, he did not have children. He never updated the beneficiary forms after his children were born. When we told Dr. Bob and Elise how they could protect their children not only from themselves while they were young and immature, but also protect them from creditors and future divorcing spouses, they were very excited about the planning opportunity.

Now Dr. Bob’s beneficiary forms list his wife as the primary beneficiary and his Retirement Protector Trust™ as the contingent beneficiary. We also set up a Retirement Protector Trust™ for his wife Elise. Dr. Bob’s Retirement Protector Trust™ has three sub-trusts. There is one sub-trust for each of their three children. When the retirement accounts are stretched by the trustee of the Retirement Protector Trust™, after both Dr. Bob and Elise have passed on, the retirement accounts will distribute an annual required minimum distribution to the trust with a life expectancy based on Taylor’s age because she is the oldest beneficiary of the trust.

To learn more about protecting your retirement account for your children with a Retirement Plan Trust, call (760) 448-2220 to schedule a time over the phone or in person with Brenda Geiger to discuss. You may also reach us through our contact page.

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