As long as you’re alive, you enjoy critical protections for your retirement funds. Specifically, the assets in an IRA or 401(k) are shielded from lawsuits, courts, and creditors. But when you die, these protections evaporate, meaning any retirement assets your loved ones inherit from you can be seized. The good news is that some estate planning provisions can restore legal protections, including standalone retirement trusts (SRTs). This type of trust can provide several benefits, allowing you to ensure that your children or grandchildren enjoy the full extent of the retirement funds you work so hard to accumulate. To learn more about living trust and estate planning options, including the SRT, make an appointment with Max Alavi APC, OC Trusts Lawyer.
How to Protect Your Retirement Accounts
Here is an unfortunate truth about retirement accounts: Once you die and these accounts are passed on to your loved ones, several key legal protections evaporate. These protections are comprehensive during your lifetime, making it impossible for anyone to seize your retirement funds via lawsuit. In most states, these safeguards disappear as soon as your retirement funds are inherited, which means your hard-earned money can be snatched away from your heirs and beneficiaries through the courts and creditors.
Is there anything you can do to prevent this and ensure that your retirement funds remain well-protected even after passing them on to a loved one? The short answer is yes, through effective estate planning.
Estate Planning 101: Start a Standalone Retirement Trust
Specifically, we recommend that you talk with your living trust and estate planning lawyer about creating a standalone retirement trust, or SRT.
An SRT is designed to be the beneficiary of your retirement funds, including funds from an IRA, 401(k), etc. Ownership of these assets does not change as long as you’re alive. When you die, however, assuming you have correctly named the SRT as the designated beneficiary of these accounts, then the trust will “inherit” your retirement assets, and a trustee will be tasked with managing and withdrawing these funds.
Why Choose an SRT?
There are several reasons why we recommend an SRT for any estate plan. The benefits include:
- The funds your heirs inherit will be well-protected from predators, lawsuits, and creditors.
- Your retirement funds will go to the people you genuinely wish to inherit them and nobody else.
- A professional trustee can provide oversight and management of your funds, while also safeguarding heirs against reckless spending.
- An SRT also enables you to plan for a beneficiary with special needs properly.
- An SRT also allows you to name minors as immediate beneficiaries without court intervention or supervision.
- You can also reap the benefits of generation-skipping transfer tax planning.
For these and many other reasons, it’s prudent to talk with your living trust and estate planning lawyer about possibly creating an SRT.
Some Estate Planning Case Studies
To provide a concrete example of how an SRT can benefit you, consider one common situation. Parents often worry that their children will one day get divorced and that a child’s inherited money may be seized by a divorcing spouse. An SRT can put some important guardrails in place to prevent this from happening.
Consider two possible scenarios. Which would you prefer for your children?
- Scenario 1: Tom and Lisa love their son-in-law Chuck and feel sure that his marriage to their daughter Liz will last forever. They bequeath their retirement plans to Liz outright upon their deaths. But five years later, Chuck files for divorce from Lisa, and ends up taking 50 percent of those retirement funds.
- Scenario 2: Tom and Lisa love their son-in-law, Chuck… but they also understand that about half of all marriages end in divorce. To acknowledge this ugly truth, they ensure that their retirement funds are well-protected when they do their estate planning. They place their retirement funds into an SRT, and when Lisa and Chuck divorce five years later, Lisa is able to keep all of that money for herself, using it to create a new beginning.
Review Your SRT with a Living Trust Lawyer
Even if you already have an SRT in place, there may be some benefit to reviewing it with a skilled attorney. This is especially true in light of the SECURE Act, passed in 2019 and effective as of 2020. Essentially, this law means that those who inherit retirement funds via an SRT will need to cash out the entire amount within a span of 10 years. If you’d like to create options for your beneficiaries to keep their funds secured in a trust for a longer period of time, talk with your estate planning lawyer about adding accumulation provisions to the trust.
If you have any questions at all about your SRT or about other methods for effective estate planning, we welcome you to contact Max Alavi APC, OC Trusts Lawyer. Alavi is one of the area’s most trusted estate planning lawyers with a proven track record and incomparable client reviews. Schedule a consultation with Max Alavi APC, OC Trusts Lawyer, at your convenience.
