A Retirement Plan Trust is a trust that acts as a shield or barrier to insulate the principal of your qualified retirement accounts such as an IRA or 401K from the trust beneficiary’s creditors, a bankruptcy, a lawsuit, or a divorcing spouse after they inherit the accounts from you. This is accomplished by having the Retirement Plan Trust itself as the primary or contingent beneficiary of your retirement accounts. Many married couples list their spouse as the primary beneficiary and their Retirement Plan Trust as the contingent beneficiary on the beneficiary forms for their retirement accounts.

Benefits of a Retirement Plan Trust

Some advantages of having a Retirement Plan Trust include protecting what children or grandchildren inherit from a future divorcing spouse, creditor, lawsuit or bankruptcy trustee. It can also be used to help provide for and protect a young or immature beneficiary, a special needs person or a beneficiary with spendthrift issues. The money that flows from a retirement account to this specialty trust can be drafted to allow a Trustee to “accumulate” the money in the trust for a beneficiary but still utilize the income tax bracket of the beneficiary. This provides the best of both worlds because of the creditor protection for the beneficiary but allowing for income tax planning advantages as well.

Should I Make the Trust “Beneficiary Controlled?”

Some may wish to give their children the opportunity to manage their trust share as a beneficiary-controlled trust at some point in the future (e.g., at the age of 30 or 35 or older). This allows the child more substantial control over when and for what purposes funds are withdrawn from the trust. It is best to discuss this option with your attorney before deciding.

Using an Accumulation Style Retirement Trust

For example, if you have two children as the beneficiaries of your accumulation style Retirement Plan Trust who inherit, and your IRA has a $1 million balance, each child’s share must be distributed to your Retirement Plan Trust within ten (10) years after the year of your passing.  If you were to pass before age 72, distributions from the accounts to the trust can be made at anytime over the ten-year period but must be completed by the end of the year on the 10th year. This rule applies to both Roth and Non-Roth retirement accounts. If you are over the age of 72 when you pass and the retirement accounts name a Retirement Plan Trust as the beneficiary, the distributions to the trust over the 10-year period would be the same RMDs you would have needed to take from the accounts if you had lived over that 10-year period, but the entire balance must be distributed to the trust by year 10 after your passing. There are exceptions to this rule to allow for a stretch out using the beneficiary’s life expectancy for special needs and chronically ill beneficiaries and some longer deferral periods for those who are minors until age 21.

Who Should Use a Retirement Protector Trust?

Retirement Protector Trusts are ideal for individuals with larger retirement accounts ($300,000 or more as a general rule) who want to protect their accounts for their children or grandchildren and create a creditor shield around the accounts for those who inherit them. It is also ideal for those who have a young beneficiary they would like to protect or one with a disability, long-term illness or spendthrift issues.

To learn more about this special type of estate planning for retirement accounts, call our office at (760) 448-2220 and talk to one of our Intake Specialists.

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