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.
(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.
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.
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:
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
Visit our resource center to learn more about the significant retirement changes that may impact you and your financial plan.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.
This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control.