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 trust for your retirement accounts is advantageous because some of the provisions in your reg­ular revocable trust may interrupt your successor Trustee's ability to creditor protect the retirement account 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. In a stand-alone Retirement Protector Trust, these provisions 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. 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. The Retirement Protector Trust is a specialty trust in estate planning which not all practitioners are versed in drafting due to its complexity.

Should I Make the Trust “Beneficiary Controlled?"

Some may wish to give their children the opportunity to manage the trust or 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 This allows the child more substantial control over when and for what purposes funds are withdrawn from the trust. There is no right or wrong way to draft the trust, but there are preferred methods. Your particular 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 to do so (which is actually a more conserva­tive approach).

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, 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 beneficiary.

Establishing the Trust

Let's 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 chat determine who the accounts can roll over to in the future. It's 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 of the inherited accounts and their own individual retirement accounts. After the surviving spouse has passed, the Trustee of the Retirement Protect Trust will have an opportunity to time withdrawals from your retirement accounts to the trust over a ten-year period in order to best maximize tax bracket planning for the bene­ficiaries (SECURE ACT 2020).

Using an Accumulation Style Retirement Trust

For example, if you have two children as the beneficiaries of your accumulation style Retirement Protector Trust who inherit at the ages of 50 and 55, and your IRA has a $1 million balance, each child's share must be distributed to your Retirement Protector Trust within ten (10) years after the year following the death of the retirement plan owner. 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.

Using a “ Conduit” Trust for Minors

If the trust is drafted as a Conduit Trust because your chil­dren are minors, the Trustee pays out a required minimum distribution directly from your trust to your child's guardian through the trust as a conduit. Each child would report the distribution to the IRS on the child's individual 1040 in­come tax return for that tax year.

Who Should Use a Retirement Protector Trust?

Retirement Protector Trusts are ideal for individuals with large retirement accounts ($200,000 plus) who want to protect the account for their children or grandchildren and create a creditor shield around the accounts for those who inherit them.


John, 54, and Sandy, 55, have been married for 25 years. They have two young adult children: Max, who is 18, and Alexis, who is 21. John was the breadwinner in the family while Sandy took care of the kids at home, so all of the re­tirement accounts are in his name. John retired early since his company got purchased, and he experienced the windfall of that transaction. John's IRA has about $700,000 in it. Although their children are great kids, with Alexis in college and Max getting ready to head off to college, they are still young and inexperienced. John and Sandy want to ensure that the kids don't make poor decisions with the money they will eventually inherit by creating accumulation style Retirement Protector Trusts. They also do not know who their children will eventually marry and are concerned about making sure the money in the retirement accounts stays with their children and does not go to their children's future spouses.

John and Sandy each set up a Retirement Protector Trust. Each of their trusts is a revocable trust funded with a nominal $10 during their lifetimes. John has updated his beneficiary form for his IRA to list Sandy as the primary beneficiary and his Retirement Protector Trust as the contingent beneficiary.

In John and Sandy's Retirement Protector Trusts, they have nominated a Successor Trustee to administer their trusts after death un ti! each of their children has reached the age of 35. When a child reaches the age of 35, their separate share trust becomes "beneficiary-controlled" by the child.

Each child at that age can act as their own Trustee and will need to ensure that 100% of each retirement account has been withdrawn from the retirement accounts within ten years from the date of death of the parent Grantor of the trust and distributed to their sub-trust share of the Retirement Protector Trust. John and Sandy want to give their children flexibility and control, but not until they are much more mature and more likely to make wise choices. After their children take over as trustees at 35 after John and Sandy have passed, they can each make distributions to themselves from the trust or allow the money in the trust to "accumulate".

Special provisions in the accumulation-style trust allow the income distributed from the retirement account to the trust to be income taxed at the beneficiary's income tax rate in­stead of the trust income tax rate which is typically higher. This creates an income tax advantage while allowing the in­come and principal to be protected inside the trust without forcing a distribution to the beneficiary.

If even greater creditor protection for a beneficiary from a divorcing spouse, creditor, predator or bankruptcy is desired, an Independent Trustee not related or subordinate to the Grantor or a beneficiary of the trust should be selected to manage the trust and make distributions.

Lastly, a Trust Protector (an independent 3rd-party that can limitedly amend the trust if changes to the law occur, a new Trustee is needed due to a vacancy, etc.) should be included in the trust for maximum flexibility for the future. In our office, we often serve in this capacity for our clients.

If you or a friend or family member would like to explore estate planning for retirement accounts such as IRAs or 401ks, please contact Katie Nance, our firm’s Intake Coordinator, at (760) 448-2220 to schedule a legal strategy meeting.