Trusts generally consist of a grantor or settlor, a trustee, and at least one beneficiary. Every trust also has another characteristic – a purpose. Trusts may be established to save taxes, protect assets, provide for someone with special needs, or distribute wealth to current and future generations. For Standalone Retirement Trusts, the purpose is to serve as beneficiary for qualified retirement funds, including IRAs.
The grantor – the person who creates the trust – funds the trust by naming it as the beneficiary of his or her Individual Retirement Account (IRA). When the grantor passes away, any funds remaining in the IRA pass to the standalone retirement trust. The trust is then distributed according to the terms of the trust.
Reasons to establish a standalone retirement trust include:
For example, Bob worked hard to build his $600,000 IRA account. Of course, he plans to use his IRA to fund his retirement but acknowledges he could pass away before he withdraws all the money. He wants his three children to split his IRA after he dies. He could simply name his children as beneficiaries of his IRA. However, Bob’s oldest child is in a shaky marriage, his middle child gambles, and his youngest child is only 12. Handing each of them a lump sum could be problematic.
Acting as grantor, Bob could establish a standalone retirement trust. He names a trustee, then names his three children as beneficiaries of the trust. The terms of the trust provide for distributions from the trust, but not large lump sums. By using a standalone retirement trust, Bob may protect his children’s inheritance from an ex-spouse, bankruptcy, and creditors. If his youngest child is a minor when Bob passes away, that child’s share would be held in trust, then distributed according to the terms of the trust. If any of his children need government benefits, like Medicaid, their part of the trust may not affect eligibility. Finally, his children likely will receive significant tax benefits by spreading their distributions over time.
Anyone wishing to set up a trust should consult with an attorney first. This is especially true for standalone retirement trusts.
At Law Offices of John Mangan, P.A., we help clients choose strategies that meet their needs. Please contact us at 772-324-9050 to schedule an appointment or fill out our Contact Form. We are located in Palm City, Florida, and serve clients in surrounding communities like Stuart, Hobe Sound, Port St. Lucie, and Jupiter, too.