Estate Planning: Properly Planning for Your Retirement Assets


According to recent data, approximately 34% of household financial assets are held in retirement accounts (approximately $28.0 trillion nationwide). The reason for this is largely tax driven as retirement accounts are (1) often funded on pre-tax dollars, thereby reducing the owner’s individual gross income for the calendar year, and (2) impose substantial penalties on the owner if a distribution is made prior to the age of 59 ½ (subject to very specific exceptions), thereby discouraging owners from taking their money out of the account early. The underlying legislative intent for the establishment of retirement accounts was the accumulation of wealth for individuals during retirement as a means to reduce reliance on social security income, with the use of the funds by future generations not being a factor under consideration.

However, as an ever-increasing number of individuals are taking advantage of the tax savings associated with retirement plans, retirement assets are beginning to constitute some of the largest assets in an estate. Most families do not engage in careful consideration of how these assets should be distributed following the passing of the owner of the individual retirement account (IRA) as compared to the assets of the estate in which a trust or a will is used to make careful distributions to the next of kin. Most of us rely on beneficiary designations to govern the distributions of these IRAs to future generations. Indeed, most families have the following beneficiary designations on these individual retirement accounts: (1) Spouse as primary 100% beneficiary; (2) Children equally as secondary beneficiary(ies).

Unfortunately, the net result of these beneficiary designations is that approximately 87% of beneficiaries completely liquidate inherited IRAs within one year of receipt, usually resulting in a substantial tax being imposed against the distribution with the result that none of these funds will be used to create any type of legacy for generations to come. In 2014, the United States Supreme Court held in Clark v. Rameker, 134 S. Ct. 2242 (2014), that assets that are rolled over by a non-spouse beneficiary are not “retirement assets” as defined by the Internal Revenue Code and thus, do not enjoy the same asset protection features as the original owner of such retirement accounts, resulting in rolled over assets potentially being subject to the creditors of the beneficiary (including in the context of a bankruptcy).

One way in which practitioners are circumventing the issues relating to the early distribution of substantial retirement assets and the lack of creditor protection is through an inter vivos trust known as a Standalone Retirement Trust (SRT). An SRT offers flexibility to the owners of the retirement accounts to create a legacy with the wealth that has been accumulated in such retirement accounts (commonly known as “stretching” the IRA), while also providing certain creditor protection features commonly associated with the distribution of wealth to a trust rather than an individual. The SRT is not a substitute for your revocable living trust (RLT), but rather complementary to the RLT. If you or someone you know has substantial retirement assets ($300,000 or more), please contact us to discuss the use of the SRT in your estate planning. For smaller retirement accounts, we can guide clients on how to best use the stretching feature of the IRA through the RLT, provided we make certain revisions to the RLT and use very specific beneficiary designations.

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