A Retirement Protector Trust is a trust that acts as a shield or barrier to insulate the principal of your IRA, 401(k) or other qualified retirement account 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 Protector Trust itself as the primary or contingent beneficiary of your retirement account. Most married couples list their spouse as the primary beneficiary and their Retirement Protector Trust as the contingent beneficiary on their retirement accounts.
Benefits of a Retirement Protector Trust
Having a stand-alone Retirement Protector Trust as the beneficiary of your retirement account is advantageous because some of the provisions in your regular revocable trust may interrupt your successor Trustee’s ability to protect your retirement accounts for your beneficiaries. For example, the payment of funeral expenses, taxes and other final expenses upon your death can be problematic for the inclusion of accumulation style trust provisions in your regular revocable trust (accumulation-style trust provisions are what provide the creditor protection from a child’s divorcing spouse, creditor, predator, or bankruptcy).
In a stand-alone Retirement Protector Trust, the payment of funeral expenses, taxes and other final expenses are not included to avoid any potential issue on that front in the future. Just to be clear, the trust never becomes the owner of your retirement account. It is simply the receptacle (the beneficiary) of any distributions from your retirement account after you (and your spouse if you are married) are gone. Who you select as your Trustee and the provisions drafted in the trust for each beneficiary will govern what happens when and whether there is creditor protection for your child or other beneficiaries.
Should I Make the Trust “Beneficiary Controlled?”
Some may wish to give their children the opportunity to manage the trust or their trust share as a beneficiary controlled trust at some point in the future after they inherit (e.g., at the age of 30 or 35 or older). This allows the child more control over when and for what purposes funds are withdrawn from the trust. There is no right or wrong way to draft the trust, but there are preferred methods. Your situation, your thoughts and feelings on this topic, and sound advice from a skilled and competent estate planning attorney will govern how the trust should ultimately be crafted.
A note of caution: If you do make the trust beneficiary controlled at a specified age, you do increase liability exposure. Accordingly, if your child experiences a bankruptcy or other creditor issue, he or she should resign as Trustee immediately at the first sign of a potential problem and replace himself or herself with a third-party Independent Trustee or request the Trust Protector of the trust to do so (which is actually a more conservative approach).
Other Unique Benefits
Another unique benefit of the Retirement Protector Trust is that you may list several beneficiaries. Each may also have distinct trust provisions. This may become important, especially if the beneficiary is afflicted with a drug or alcohol problem, is a minor or young adult, has a problematic marriage, or has poor spending habits. If the beneficiary has special needs issues, their share of the retirement account should flow through a separate Retirement Protector Trust with the special needs person as the only trust beneficiary and the trust containing special needs trust language.
Establishing the Trust
Let us look at how the trust works in a practical sense. If you are married, you will want to set up a stand-alone Retirement Protector Trust for you and one for your spouse. This is the recommended approach due to the complexity of the IRA rules that determine who the accounts can roll over to in the future. It is also unknown who will pass first. After the death of the first spouse, many spouses will roll over the retirement accounts of the deceased spouse to themselves. Then, they will need to update the beneficiary designation forms to name the surviving spouse’s Retirement Protector Trust as the beneficiary of the accounts they inherited from their spouse and their own individual retirement accounts.
After the surviving spouse has passed, the successor Trustee of the Retirement Protector Trust will have an opportunity to time withdrawals from your retirement accounts to the trust over a ten-year period, in most cases, to best maximize tax bracket planning for the beneficiaries (SECURE ACT 2020).
Who Should Use a Retirement Protector Trust?
Retirement Protector Trusts are ideal for individuals with funds in their retirement accounts totaling over $400,000 who want to protect the money for their children, grandchildren or other beneficiaries and create a creditor shield around the accounts for those who inherit them. Common threats to the inheritance include a beneficiary’s divorcing spouse, a creditor, predator, or a bankruptcy trustee.
If you or a friend or family member would like to explore estate planning for retirement accounts or needs help establishing or updating an estate plan, please contact us at (760) 448-2220 or at https://www.geigerlawoffice.com/contact/cfm.