Trusts can play a variety of roles in our estate plans, since they can be specifically set up to attend to particular life circumstances. For example, a retirement plan trust shields the principal of retirement accounts, which can be especially helpful if conflicts, lawsuits or bankruptcy are on the horizon, or if there are minors or individuals with special needs to consider.
Insulating Funds
In anticipation of life’s twists and turns, trusts can be established in support of particular goals. For example, trusts allow us to plan ahead for challenges as we age, or arrange for payment disbursements for minors and those with special needs. Because trusts do not go through the probate process, they generally ensure designated assets get to beneficiaries more quickly, and with greater confidentiality than those left in a will. As experts at Geiger Law point out, trusts can even be established to protect important assets, such as the principal of qualified retirement accounts (like a 401k or IRA):
A Retirement Plan Trust…acts as a shield or barrier to insulate the principal of your qualified retirement accounts…from the trust beneficiary’s creditors, a bankruptcy, a lawsuit, or a divorcing spouse after they inherit the accounts…This is accomplished by having the Retirement Plan Trust itself as the primary or contingent beneficiary of your retirement accounts. Many married couples list their spouse as the primary beneficiary and their Retirement Plan Trust as the contingent beneficiary ….Advantages of having a Retirement Plan Trust include protecting what children or grandchildren inherit from a future divorcing spouse, creditor, lawsuit or bankruptcy trustee….The money that flows from a retirement account to this specialty trust can be drafted to allow a Trustee to “accumulate” the money in the trust for a beneficiary but still utilize the income tax bracket of the beneficiary. This provides the best of both worlds….
Experts note that retirement trusts can be especially useful for those with $300,000 or more in their retirement accounts who “want to protect their accounts for their children or grandchildren and create a creditor shield around the accounts for those who inherit them.” Retirement trusts can also be used to set a aside assets for young beneficiaries, those with special needs or even individuals with “spendthrift issues.” Whenever a trust of any kind is created, it is important to carefully designate a trustee to administer the assets in accordance with the plans specified in the trust agreement. It is possible to name oneself as a trustee, along with a successor trustee. It is common, though not a rule, for families to designate a loved one or friend to serve as the trustee. An independent fiduciary is also an option. Keep in mind that the trustee role is not a ceremonial one. Trustees are fiduciaries: they are legally bound to the highest duty of care in executing their responsibilities. In fact, given the significant duties undertaken by trustees, the trust agreement may require procurement of a trustee bond.
A trustee bond is a type of fiduciary bond that protects the interests of the trust and beneficiaries by guaranteeing the faithful performance of a trustee in accordance with the law. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter a payment method. The bond can be printed or e-filed from anywhere. Trustee Bonds Here
Beneficiary Controlled or Accumulation Style?
If you choose to establish a Retirement Plan Trust, there are several approaches to doing so. For example, you’ll want guidance from your lawyer about whether a beneficiary controlled approach or accumulation style best accomplishes your goals. Geiger Law observes: “Some may wish to give their children the opportunity to manage their trust share as a beneficiary-controlled trust at some point in the future (e.g., at the age of 30 or 35 or older). This allows the child more substantial control over when and for what purposes funds are withdrawn from the trust.” On the other-hand, here’s an example of an accumulation approach:
If you are over the age of 72 when you pass and the retirement accounts name a Retirement Plan Trust as the beneficiary, the distributions to the trust over the 10-year period would be the same RMDs you would have needed to take from the accounts if you had lived over that 10-year period, but the entire balance must be distributed to the trust by year 10 after your passing. There are exceptions to this rule to allow for a stretch out using the beneficiary’s life expectancy for special needs and chronically ill beneficiaries and some longer deferral periods for those who are minors until age 21.
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