The growth of retirement accounts has increased significantly over the past couple of decades with such accounts often being the largest component of a person’s wealth.
Many people name a spouse or an adult child as the beneficiary of their retirement assets and generally this makes the most sense. For some individuals with young children, a blended family, or a spendthrift or disabled adult child, however, it may be advisable to avoid an outright distribution of the retirement account. Instead, a special type of trust that is designed to act as the beneficiary of the retirement account might be a better alternative. This type of trust would receive and hold distributions from the retirement account to be used for the benefit of the beneficiary and is often referred to as an IRA Trust. It has become a popular estate planning tool used to preserve the "stretch" payout of retirement accounts.
An IRA Trust must meet specific requirements, but if properly drafted, this trust can provide your loved ones with the tax advantages of the “stretch” payout, financial management, and creditor protection while also avoiding probate upon your death.
The trustee manages investments and makes distributions to beneficiaries in accordance with terms of the trust, just like any trust. The trust can be designed to allow the trustee to distribute the Required Minimum Distributions outright to a beneficiary every year, but additional distributions can be subject to the trustee’s discretion (referred to as a conduit trust), or all distributions, including the Required Minimum Distribution, can be held or distributed to the beneficiary as determined by the trustee (accumulation). Either choice allows the retirement assets to be used for the benefit of your loved ones.
A retirement trust has many advantages to your beneficiaries:
- Provides asset protection of the principal from creditors or in the event of divorce;
- Allows for continued tax-deferred growth and minimizes the tax burden;
- Allows the trust creator to provide for children from a prior marriage as well as the surviving spouse;
- Prevents young adults from demanding a lump-sum distribution because they are unaware of the tax consequences;
- Avoids the need for a guardianship and lump-sum distribution for minor beneficiaries;
- Allows for trustee to manage the investments and to act in the best interest of the beneficiaries.
The IRA trust must be designed with specific requirements in order for your loved ones to enjoy the advantages outlined above. We are happy to help you determine if an IRA trust is right for you and your family. Contact us today.