Are you planning on leaving a retirement account to your loved ones? Did you know that inherited retirement accounts do not have asset protection? This could result in creditors seizing money from the accounts to settle claims against your beneficiaries. Luckily, retirement funds can be protected by entering a Standalone Retirement Trust (SRT), which can protect the inheritance from creditors, bankruptcy trustees and divorce.
There are many practical reasons to protect your retirement account including:
1. Protection from creditors. Assets held in an IRA or other retirement account are generally safe from most creditors, so the account owner doesn’t have to worry about these funds being seized during life. But upon the decedent’s death, those protections end and creditors may have a claim on any remaining money. Holding retirement accounts in a standalone retirement trust shields them from creditors.
2. Allows the account owner to have more control. You may be worried about your beneficiary spending the inheritance frivolously. With an SRT the amount they receive and when can be controlled, ensuring the inheritance will not be wasted.
3. Extends tax deferral benefits. As soon as your beneficiary starts taking distributions from your retirement accounts, their tax liability kicks in. Without the protection of an SRT, they would be required to empty the account within a certain number of years and pay any necessary taxes at that time. Stretching distributions extends tax benefits and allows the money to grow.
4. You are remarried with children from a previous marriage. If you are remarried and have children from a previous marriage, your spouse could intentionally (or even unintentionally) disinherit your children. You can avoid this by naming the spouse as a lifetime beneficiary of the trust and then having the remainder pass onto your children from a previous marriage after your spouse’s death.
A properly drafted SRT can do all of the following:
- Protect the inherited retirement accounts from creditors, predators, and lawsuits
- Ensure inherited retirement accounts stay with blood relatives
- Allow for experienced investment management and oversight of the account funds by a professional trustee
- Prevent the beneficiary from withdrawing lump sums of the inheritance, which could lead to tax ramifications and a loss of stretching out the investment
- Provide proper planning for a special needs beneficiary to avoid disqualifying the beneficiary from receiving need-based government benefits
- Allow you to name minor beneficiaries, such as grandchildren, without the need for court-supervised guardianship
- Facilitate generation-skipping transfer tax planning to ensure taxes are minimised or even eliminated at each generation of your family
Not sure if you need an SRT? Music City Estate Law in Franklin, TN can help you plan the best SRT for you and your family so you can put your mind at ease knowing your retirement fund will go to your family. Your retirement plan shouldn’t be a worry, so don’t hesitate to contact us so we can get you on the right track. We look forward to hearing from you soon!
