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Can Retirement Trusts Help Protect Beneficiaries?

Jeremiah H. Barlow

JD, Head of Family Wealth Services


Many of us fill out a beneficiary designation form for our retirement accounts. But it’s important to consider how your beneficiaries will receive these assets.

Grandparents with grandson

(Originally published in Wealth Point, June 2018 – updated February 2020 to include SECURE Act provisions)

While most people have determined who would be the beneficiary of their retirement assets, many have not thought about how the beneficiary would receive these assets. A retirement trust may assist you in ensuring multi-generational control over how the assets would flow, while helping your beneficiaries extend the income stream and insulate them from potential unknown risks. We encourage you to talk to your advisor to see if a retirement trust has a place in your wealth plan.

What To Think About After You Complete A Beneficiary Designation Form

Whether you have one individual retirement account (IRA) or several, or other similar retirement savings plans (such as a 401(k), 403(b) or 457), it’s highly likely that you did this one thing — you completed a beneficiary designation form, filling in the names and information for your beneficiaries, or people who would receive your retirement assets upon death.

While the planning for your beneficiaries may have ended there, it’s important to consider how your beneficiaries will receive these assets. Most people are unaware that without proper planning, beneficiaries may be harmed—more than helped—when inheriting an IRA. This is alarming, as retirement accounts frequently make up a significant portion of a person’s assets. According to the Investment Company Institute (ICI), total US retirement assets were $30.1 trillion as of the third quarter of 2019 and comprised 33 percent of all US household financial assets, as shown in Chart 1.

What Happens To Ira Assets When It Passes To Beneficiaries?

With changes from the SECURE Act, beneficiaries inheriting retirement assets must empty out all accounts within 10 years of the account owner’s death (i.e. 10-year rule). There are no annual required minimum distributions (RMDs) for beneficiaries so there is some flexibility on when your beneficiaries can take these distributions. And there are exceptions to this 10-year rule for spouses, minor children, and chronically ill or disabled beneficiaries, as well as for beneficiaries not more than 10 years younger than the account owner (often a significant other or sibling). Learn more about the SECURE Act here.

Without careful consideration, passing the IRA to a beneficiary may result in a host of other problems:

  • When an IRA is left outright to a beneficiary, the original IRA owner loses control of who will eventually inherit the IRA assets after the death of the first beneficiary. This can be a problem with blended families, or a mixed family as a result of a second marriage.
  • The IRA beneficiary is too young, a spendthrift, or may be incapacitated, unable to manage the IRA funds.
  • A disabled beneficiary could lose state and federal government benefits upon receipt of IRA funds.
  • Lawsuits filed against a beneficiary or bankruptcy could result in the loss of the IRA funds.
  • If a beneficiary gets a divorce, the divorcing spouse could take the retirement assets.


Retirement Trusts Can Protect Your Beneficiaries

A retirement trust is designed to offer protections for your beneficiaries regarding their inherited retirement accounts. Additionally, a retirement trust can allow more control over who receives your retirement assets and how it may be used by your beneficiaries. A retirement trust is designed specifically to protect retirement assets for a beneficiary by navigating the nuanced retirement laws, such as the 10-year rule, and its various exceptions. At its core, a retirement trust allows a trustee to keep retirement assets in the trust. As a result, when the trustee receives distributions from a retirement account, they can determine when and how much of the funds are to be distributed to a beneficiary. This discretion allows a trustee to protect the assets when a beneficiary is going through a time of turmoil, such as a divorce, bankruptcy, or any other creditor issue.

It’s important to note that when a trust is the beneficiary of an IRA, the terms of the trust must adhere to specific requirements to take advantage of the tax deferral over the 10-year rule, or longer. A standard revocable trust generally does not meet these requirements.

Even if you have no current concerns about how your beneficiaries will manage the IRA assets after your death, a retirement trust may protect your beneficiaries from unknown risks that may arise later. Talk to your advisor to see if retirement trusts can serve as a smart planning solution for your wealth planning needs.


Source: ICI, December 31, 2017

Source: Financial Engines calculator

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