Did you know a Standalone Retirement Trust is an estate planning vehicle that can serve as the beneficiary of unspent tax-qualified retirement accounts when you die? In other words, you work, save, and invest over the course of your working life to build up an Individual Retirement Account (IRA) or 401k, and if there are any funds left over at the time of your passing, or you and your spouse’s passing, if applicable, then those funds would go to the Standalone Retirement Trust.
Why not leave them directly to your desired beneficiaries? The simple reason is because there are many potential downsides, depending on your circumstances. Additionally, new federal reforms affecting tax-advantaged retirement accounts have made Standalone Retirement Trusts more attractive than ever before.
Leaving liquid investments to adult children and grandchildren carries the classic risk of frivolous spending, as opposed to using the inherited funds to jump-start legacy wealth creation. A Standalone Retirement Trust can help resolve this in two ways: by selecting a trustee to oversee the distribution of funds and leaving behind instructions for how the trustee should proceed. This can protect financially immature heirs and loved ones who may become ill or incapacitated. Moreover, directly inheriting retirement assets may strip them of their original protections, making the funds available to creditors pursuing debts. The funds, however, when distributed to a trust, may receive substantial creditor protection.
Prior to new federal legislation, known as the SECURE Act of 2019, it was possible for individual beneficiaries of tax-qualified accounts to “stretch” annual required minimum distribution (RMD) payments that beneficiaries must receive annually from inherited retirement assets over each beneficiary’s expected life. This was a tremendous advantage from an income tax perspective. Under the SECURE Act of 2019, however, the opportunities to “stretch” have mostly evaporated (note: there are some exceptions, such as for disabled or chronically ill individuals, and a Standalone Retirement Trust can be drafted to preserve that option for such persons).
With the “stretch” option mostly having disappeared, the question to ask yourself is whether you are comfortable naming a non-spousal individual as beneficiary (or even as alternate beneficiary) of a tax-qualified account, knowing that the beneficiary could choose to liquidate the account right away upon your death. Such a decision could produce a very bad income tax result and directly expose inherited funds to creditors, divorcing spouses, etc.
We want you to know that all Standalone Retirement Trusts are not created the same. You will need to share your goals for yourself, your family, and your legacy, with your Florida estate planning attorney. He or she is going to be able to make recommendations on the type of trust that is right for you. Specifically, we want to mention both Conduit Trusts and Accumulation Trusts in this example.
You may not have heard of either of these trust types before. While they were used prior to this year to help reach your estate planning goals, they have gained recent popularity due to the implementation of the SECURE Act and the protections they can provide to you. Together, these trusts are known as “See Through” Trusts as they allow the IRS to “look” through them as an estate planning tool to “see” the “Designated Beneficiary.” While your attorney can provide you with specific guidance, in general, the trustee of a Conduit Trust must distribute to the trust beneficiary all available income and principal. By contrast, under an Accumulation Trust the Trustee can choose to accumulate benefits for the beneficiaries, which can allow for invaluable creditor protection.
This is just the start of the conversation you are going to need to have with your experienced Florida estate planning attorney. There are plenty of other benefits and protections involved, including protections for minors inheriting leftover retirement funds and special needs children or grandchildren who would otherwise risk losing government benefits due to exceeding requisite income limits. For more information, do not wait to schedule a meeting to ask us your questions on this important topic.