Have you thought about what will happen
to your Retirement Plans after you're gone?

Few people truly understand what could happen to their retirement plans after they pass away. In theory, leaving a retirement plan to your family seems pretty simple. All you need is a beneficiary designation form where you designate a primary and a contingent beneficiary. In real life though, what happens to retirement accounts after the death of a plan owner is oftentimes surprising.

There are numerous reasons for the surprises. For example, sometimes your intended (or correct) beneficiaries are not named because a beneficiary designation form was not updated after a birth, death, marriage or divorce, and this lack of follow through results in unintended or disinherited beneficiaries. Another common shock occurs when retirement plans are left to children who are not ready to handle the funds. First of all, if the funds are left to a minor, a court guardianship will likely be needed. Secondly, if a retirement account is left to a child through a living trust which does not have IRS See-Through Provisions, that plan could be forced into paying out in five years or less, causing an acceleration of taxes and loss of tax deferral opportunities.retirement-trusts

What's the big deal you wonder? The answer is best illustrated with examples: So, for instance, if you leave an IRA worth $201,597 to a child and the IRA earns an annual rate of return of 5% per year (a very realistic return over time), most kids (according to the IRS) will take the money out of that IRA in five years or less. Which consequently, if done, will leave your child with $141,118, after paying $60,479 (on average), in income taxes. Incidentally, and interestingly, heirs usually take the money out of the IRA to buy a nice car and a few other tangible items. Surprisingly, this happens so often, that psychologists have dubbed this behavior, “the found money syndrome.”

Now let's assume the same set of circumstances as above, but instead of leaving that IRA outright to your child, you set up a Retirement Trust to receive the proceeds from your inherited retirement account. Also, let's assume your child is 40 years old, when he or she inherits that IRA: By utilizing the advantages of a Retirement Trust, your child will receive a total of $715,040, over their lifetime. If we tweak the example a little bit more and that IRA is left to a grandchild via a Retirement Trust, and the grandchild is 10 years old, he or she will receive $1,909,564, over their lifespan. (Yes, you read that correctly.) Thus, the realistic and conservative conclusion is that typical returns received by your loved ones when using a Retirement Trust are 3 to 10 times larger, than when retirement accounts are simply left directly to a child or grandchild!

Still, you might be saying to yourself, “My kids are responsible and will only take out their required minimum distributions, so they will receive a much larger sum overall, anyway.” But, even if that is true, have you asked yourself: What happens if and when my kids pass away? Where do the retirement accounts go then? The answer is all across the board, of course. It will depend on who your child has re-named as his or her alternative beneficiaries. If they did not name anyone, a court probate could be triggered, and/or worse, the benefits could wind up going to the wrong persons – such as a spendthrift grandchild or what some parent's suspect to be the child's “evil” spouse (incidentally, it is important to note that with a divorce rate of over 50% in California, most “creditors” are the future ex-spouses of your children). At any rate, all of that might still be okay, but there are even more potential problems...

retirement-trusts That is, even if your beneficiaries can resist the temptation to take the money and run, and you don't care who the secondary beneficiaries are, there are currently new huge creditor protection dangers. That's because in the 2014 Clark vs. Rameker Supreme Court case, the high court ruled that inherited IRAs are no longer protected in bankruptcy. The ramifications of this decision reach far and wide. Today, divorcing spouses, business partners, foreclosing banks and the like (of your children), can potentially attach your inherited retirement accounts! The long and short of all of the above is that the only way to truly ensure that stretch-out opportunities are not lost - as well as your heirs being able to receive asset protection on retirement accounts inherited from you - is through the use of a Retirement Trust.

How do Retirement Trusts work? Well, besides naming YOUR potential beneficiaries for decades, you can name YOUR Trustees, as well as Special Trustees and Trust Protectors (if you want extra protection) to run that trust. All of these key persons are likely needed to ensure that the trust runs properly for years to come. You can also designate exactly how conservative or liberal the distributions from your Retirement Trust should or needs to be, for the benefit of your heirs. In reality, Retirement Trusts are more complex than what is outlined here, but more in-depth details are beyond the scope of this section.

If you would like to find out more about setting up a Retirement Trust for the benefit of your family,
please contact our office and schedule an initial consultation.