Oswego Trust Attorney: Retirement Trust Benefits

 Posted on February 09, 2023 in Estate Planning

Estate planning is crucial to protect your assets and allow for the distribution of your assets upon your death. Implementing a revocable living trust is the best way to allow for a seamless transition upon your death. However, while the trust has the benefit of protecting your intended beneficiaries' inheritance, it needs to provide for retirement assets adequately. A way around this would be to create a retirement trust, which will protect your retirement assets while still utilizing the retirement account's tax benefits.

Any individual can use a retirement trust. However, it is utilized mainly by those with large retirement account balances. Still, any person can benefit from a retirement trust as it will protect beneficiaries that would not otherwise be present without a retirement trust.

A retirement account should not be placed into a revocable living trust because the entirety of the account will be transferred, meaning that all the taxes on the account must be paid upfront. This eliminates the desired tax benefits of a retirement account and will significantly deplete the funds. Instead, individuals typically name the intended beneficiaries individually to keep the tax benefits. The issue with this approach is that those payments are not protected against creditors, which could make the beneficiary ineligible for government benefits should they become incapacitated. 

What is a Retirement Trust and How Does it Work

The retirement trust is an estate planning tool that allows for the protection of the beneficiaries’ inheritance while still being able to utilize the tax benefits associated with retirement accounts. When a retirement trust is created, it will be the beneficiary of your retirement accounts. This means that, upon your death, the funds in the retirement accounts will automatically be transferred to your retirement trust.

Under a retirement trust, the initial transfer will not trigger the payment of taxes upfront because the retirement trust works in coordination with the Tax Code, meaning that the retirement trust will account for required minimum distributions that are required by tax laws to keep tax payments at a minimum while still issuing the inheritance to the beneficiaries. 

Beneficiary Protections

A retirement trust brings in the beneficiary protections you would see in a typical revocable living trust. One of the most significant protections is that the inheritance would be shielded from a divorce action. For instance, if a beneficiary under the retirement trust got married and later went through a divorce, the inheritance from the retirement trust would be considered non-marital property. It would not be subject to distribution in the divorce proceeding. 

Another significant benefit is that the beneficiary's inheritance under the retirement trust is shielded from lawsuits and bankruptcy. If the beneficiary was getting sued in their capacity, their assets are subject to the lawsuit and can be accessed by creditors. The benefit of a retirement trust is that it protects the inheritance from being subject to a lawsuit, and those funds cannot be seized. 

Finally, a retirement trust has the added benefit of avoiding income limitations that would result in ineligibility for government assistance. If a beneficiary is disabled or becomes disabled, then specific requirements must be met to be eligible for government assistance. One of the most considerable requirements is the income limitation. If the beneficiary makes too much money, then they will not be able to receive help. The benefit of the retirement trust is that the Trustee can create a supplemental trust, which gives the disabled their inheritance in small portions to ensure they are not put over the income threshold. 

Distributions to Beneficiaries

Similar to a revocable living trust, the Trustee is in charge of managing the retirement trust and making distributions to the beneficiaries. While the trust maker is alive, they serve as the Trustee. When the retirement trust is created, the trust maker will name a Successor Trustee, who will take over the role of Trustee when the trust maker passes away or becomes incapacitated. The trust maker can name whoever they wish as the Successor Trustee, so long as the individual is at least eighteen (18) years of age. Once the Successor Trustee takes over, that person is in charge of managing the retirement trust and making the required minimum distributions to the beneficiaries per the trust's distribution terms.

Reputable Yorkville Estate Planning Attorneys 

For a retirement trust to work correctly, it must contain specific language in line with the Tax Code. That is why it is imperative to find a reputable estate planning attorney to assist in the creation of your estate plan. At Peace of Mind Asset Protection, LLC, the attorneys, and staff and well-served in asset protection and creating an estate plan that follows applicable tax laws. We conduct a risk assessment to determine the best estate plan to protect your assets and beneficiaries. To inquire more about our services, call our office at 630-882-2467.