December 1st, 2019
Originally published in the July 2019 Dominion Post, Senior Post series.
As we continue our series on trusts, we will explore how savings in your qualified retirement accounts, such as IRAs and 401k plans, fit into estate plans. The tax-deferred nature of these accounts may result in undesired tax outcomes if the holdings in these accounts are moved to most standard trusts. However, current laws do allow a special type of trust called “a retirement trust” to protect your beneficiaries from cashing out these accounts too soon after your death.
Retirement trusts differ from other trusts because other trusts are usually funded with assets right away, but a retirement trust does not receive the assets prior to the death of the retirement account owner. Meaning the owner remains the owner of their retirement account and the owner continues to manage the account. The retirement trust is merely on standby as a primary or contingent death beneficiary of the account.
If you wish to name charities as beneficiaries of your retirement account, you will designate the charity on the account beneficiary forms directly, as charities should not be named beneficiaries of a retirement trust for tax reasons. You can then designate the remaining percentage of the account to the retirement trust that names individuals as beneficiaries.
The individuals named in the retirement trust will receive the required minimum distribution as necessary after your passing and will have the option of additional distributions as you designate when your trust is formed. You may direct that a beneficiary may remove all or just a portion of their share of the trust or designate specific ages or time periods that distributions may be made. As long as the assets have not been released to the beneficiary, the beneficiary may have some protection from creditors and divorce.
In March, the House and Senate introduced their respective bills regarding the ability for non-spouse beneficiaries to stretch qualified accounts over a period of years. If either version of these bills becomes law, non-spouse beneficiaries may be required to cash out inherited qualified accounts within five or ten years of the owner’s death. This change will allow the government to accelerate their tax revenue from beneficiaries of inherited retirement accounts.
Retirement accounts are also handled differently during a health crisis requiring long-term care. While many assets may be legally protected by utilizing trust strategies which are completed at least five years in advance of the health crisis, qualified accounts are usually handled at the time of the crisis. Sometimes qualified assets are well-suited to pay for medical expenses due to a potential medical expense deduction for your taxes. It is important to communicate and coordinate with your professional advisors, such as your accountant and attorney, as soon as you know a health change requiring long-term care is imminent.
Scheduling checkups periodically with an experienced estate planning attorney ensures that your estate plan does not become outdated due to changes not only in the law, but also changes in your family or your health.
Peace of mind and the best financial and health outcomes are usually achieved by those who plan in advance. An advanced plan with your elder law attorney and other trusted advisors usually includes an estate plan with elder law and disability provisions, a balanced investment portfolio and sometimes even insurance products. Stay tuned next month as we continue our series on trusts that help you plan ahead for the future!