A Standalone Retirement Trust solves a number of issues related to leaving behind tax-qualified retirement accounts as an inheritance to non-spousal beneficiaries. In other words, leaving unspent funds from an IRA or 401k directly to your loved ones has some downsides.
People with IRAs, 401ks, and similar accounts, work, save and invest a portion of their paychecks into these tax-advantaged assets in exchange for employer matching funds and tax-deferred growth. They have proliferated in recent decades as guaranteed employer pensions have gone by the wayside. With or without continued matching funds, these retirement assets allow for unaffected tax-deferred growth until you either cash out penalty-free after age 59 ½, or when you begin to make annual required minimum distributions (RMD) at age 72, or 70 ½ if before January 1, 2020.
If there are any unspent funds in the accounts at the time of your death, leaving them directly to adult children, grandchildren or other non-spousal heirs strips the retirement assets of their original protections, making the funds accessible to creditors. It also exposes the beneficiaries to income taxes and involves the classic risk of putting money into the hands of potentially immature individuals.
A Standalone Retirement Trust, however, protects your loved ones by becoming the retirement account beneficiary. That means when you pass away, or when your spouse passes away after you, if applicable, any remaining tax-advantaged retirement account funds go to the trust and are then distributed by your hand picked trustee to your children, grandchildren or other desired beneficiaries.
This estate planning vehicle allows for beneficiaries to be protected from creditors, provides various tax benefits, creates a stiff tax penalty as a check on beneficiaries looking to cash out and waste inherited funds, and provides supervision of the funds by the selected trustee. Other benefits include shielding special needs beneficiaries from income limits tied to government benefits, and protections for minor children who might otherwise require a court-appointed financial guardian.
Standalone Retirement Trusts have become increasingly attractive in light of recent federal retirement reforms affecting tax-qualified retirement accounts. Due to changes contained in the SECURE Act of 2019, beneficiaries who inherit IRAs and other applicable retirement assets now have to liquidate the accounts within 10 years or face a hefty lump sum tax. A Standalone Retirement Trust avoids this by allowing beneficiaries to receive minimum distribution payments for as long as they wish, or the funds allow.
We know this article may raise more questions than it answers. We encourage you to contact our office to schedule a meeting now, or at any point in the future, to learn how a Standalone Retirement Trust might be right for you, or someone you love.