Secure Retirement Benefits for Your Family
Few people fully understand what could happen to their retirement plans after they pass away. In theory, leaving a retirement plan to a loved one seems pretty simple. All you need is a beneficiary designation form where you designate a primary, as well as a contingent, beneficiary. In real life, however, what happens to retirement accounts after the death of a plan owner is sometimes surprising.
There are numerous reasons for the surprises. For example, it could be that 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. Second, under the SECURE Act passed in December of 2019, most beneficiaries can no longer stretch out minimum required distributions over their lifespan. Under the law now, beneficiaries of retirement accounts must take out retirement funds (and pay taxes) within ten years of inheriting those accounts. It is important to note however, that there are exceptions for spouses, disabled/chronically ill beneficiaries, and minors, to name a few. In these scenarios, it could make a lot of sense to direct retirement accounts to a “special” trust (e.g., an IRA retirement trust) so those funds can be managed (and not wasted) for the benefit of your beneficiaries. On the other hand, you might be wondering why an entirely different trust is needed, especially for a surviving spouse.
Good question! There are many answers. But let's explore one example to illustrate the point: many of our clients are in their second marriage and have a “blended” family. In this situation, when you or your spouse have children from a prior relationship, sometimes the owner of the retirement plan wants the plan to provide income to his or her surviving spouse while he or she is alive, but after both spouses are gone, the original owner of that retirement plan wants the remainder of those accounts to go to their beneficiaries (e.g., their children). If instead of using a Retirement Trust, they just name their spouse as the primary beneficiary of a retirement account, when both spouses are gone, the last surviving spouse can leave that retirement account to their children from a prior relationship (in other words, disinherit your kids in favor of your spouse's kids). The surviving spouse could also end up remarrying an entirely new person and leave your retirement account to a third spouse, who in theory could ultimately leave any remaining funds in the retirement account to children outside of both of the original relationships, or to anyone else for that matter. That is, if you leave your retirement account(s) to someone, they can later leave it to anyone else, defeating any intent you might have to leave the remainder of your retirement account(s) ultimately to your heirs. In these situations, an IRA Retirement Trust is incredibly important.
Also of concern is the 2014 Clark vs. Rameker Supreme Court case in which 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 (of your beneficiaries) and others, can potentially attach the inherited retirement accounts (which came from you!). Still, you can provide a certain degree of protection for your children (or other beneficiaries) by utilizing an IRA Retirement Trust. Given the frequency of divorce, bankruptcy, lawsuits of any kind, etc., many parents like knowing that their retirement accounts are locked up for a good period of time for the benefit of their beneficiaries, and not their beneficiaries' creditors.
How Do IRA Retirement Trusts Work?
Besides naming YOUR potential beneficiaries, you can name YOUR trustees, as well as special trustees and trust protectors to run that trust. All these key persons are needed to ensure that the trust runs properly, while retaining as much creditor (and predator, e.g., future ex-spouses) protection as possible. You can also designate exactly how conservative or liberal the distributions from that retirement trust should be, for the benefit of your loved ones.
If you would like to find out more about setting up an IRA Retirement Trust for the benefit of your loved ones, please contact our office to schedule an initial consultation.