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Who is named as the beneficiary of your IRA or other retirement plan account? A Standalone Retirement Trust (SRT) may be a better option!

Posted by Niki M. Sturm | Jan 30, 2025 | 0 Comments

Who is named as the beneficiary of your IRA or other retirement plan account? A Standalone Retirement Trust (SRT) may be a better option! 

 

When it comes to estate planning, many individuals focus on their real estate, personal property, and other investments. However, one of the most significant assets in many estates is retirement accounts, such as 401(k)s, 403(b)s, IRAs, and Roth IRAs. Properly managing these accounts is crucial not only for effective wealth transfer but also for ensuring that your estate plan aligns with your wishes. 

 

You may have created a Living Trust to ensure that your beneficiaries receive their inheritance. IRS regulations stipulate that retirement accounts must be individually owned. This means you cannot transfer ownership of these accounts to a trust. Instead, these accounts pass directly to designated beneficiaries. You may have chosen to name specific persons individually or you may have named your trust as your beneficiaries.  

 

Here are reasons why naming specific individuals or your Living Trust may not be the best option: 

 

  • Your Trust has not been updated recently or you expect to inherit a large retirement account from a parent or sibling and their estate plan is outdated. 

 

  • Your beneficiaries are employed in “litigious” careers such as the medical field, construction or professional services. 

 

  • You are concerned that your beneficiaries are a spendthrift – they will be careless and not handle receiving a large inheritance of taxable funds properly. 

 

  • You are concerned that your beneficiaries may be headed for divorce or bankruptcy, and you want to protect their inheritance. 

 

  • You have a chronically ill or disabled beneficiary who receives government assistance, and an inheritance will disqualify them. 

 

  • Your beneficiaries are minors or legally incapacitated. 

 

  • You are married but have children from a past marriage or relationship. 

 

 

Outdated Trusts and Estate Plans.  

 

If your estate plan or the estate plan of someone you expect to inherit retirement accounts from is more than 10 years old, it may no longer provide adequate protection from creditors when retirement accounts are inherited. Under the Employee Retirement Income Security Act (ERISA) and the Bankruptcy Abuse Protection and Consumer Protection Act of 2005 (BACPA), retirement accounts are protected from creditor seizure. Due to a 2014 United States Supreme Court decision and the Secure Act of 2019, older, outdated Trusts may not provide the proper protection needed to avoid creditor seizure for inherited retirement accounts. This means that if the person who inherited the retirement accounts becomes subject to creditors, including bankruptcy and litigation judgements, the inherited assets will not be protected. 

 

Beneficiaries in “litigious” careers. 

 

Beneficiaries in litigious careers, such as those in the medical field, construction services, or professional services (e.g., attorneys, financial advisors, CPAs), face potential litigation risks. Retirement accounts inherited in their name alone or through improperly planned Trusts are vulnerable to judgments. 

 

Beneficiaries are a spendthrift. 

 

 If you want to control how and when your beneficiaries receive their retirement account inheritance distributions, proper planning is needed. Beneficiaries may not understand how a large distribution will be taxed and create bigger issues later when taxes are due. Beneficiaries may be careless, have addiction issues, or not mature enough to manage funds properly and squander their inheritance away.  

 

Beneficiaries headed for divorce or bankruptcy. 

 

Under the Employee Retirement Income Security Act (ERISA) and the Bankruptcy Abuse Protection and Consumer Protection Act of 2005 (BACPA), retirement accounts are protected from creditor seizure. When a retirement account is inherited, these protections disappear. Any retirement accounts inherited by your beneficiary will be subject to division in divorce proceedings and attachment by bankruptcy creditors.  

 

Beneficiaries receive governmental assistance. 

 

If your beneficiary is chronically ill or disabled and receives governmental benefits, an inheritance can disqualify them from receiving future assistance until all the inherited funds have been spent down. This could potentially create a future hardship for your beneficiary and any future generations. 

 

Beneficiaries are minors or legally incapacitated. 

 

If your beneficiaries are minors or legally incapacitated, they will not be able to directly inherit retirement accounts. Court proceedings will need to be initiated to nominate a conservator to handle the inheritance. This can be costly and may involve long term, burdensome administration by the conservator.  

 

Married and have children from a previous marriage or relationship. 

 

Due to the benefits that spouses receive when they inherit retirement accounts, naming your current spouse is generally recommended. This can become delicate when you have children from another marriage or relationship. Your spouse may intentionally or unintentionally disinherit your children, even if you name them as the backup or contingent beneficiaries on your retirement account.  

 

The good news is that there is another option available to you! A Standalone Retirement Trust (SRT)is a separate trust that offers a unique way to manage and protect your retirement accounts. Because it is specifically named as the beneficiary of your retirement accounts, the key benefits include: 

 

  • Control Over Inheritance: You can specify detailed beneficiary disclaimers and contingencies in your SRT beneficiary designations, ensuring your retirement accounts are inherited exactly as you wish. 

 

  • Trustee Selection: You can appoint a person or entity as the Trustee, who will have the discretion to distribute your retirement accounts or the required distributions from them according to your directions. 

 

  • Protection of Inheritance: The Trustee can also ensure proper management, income tax liability, and protect your retirement accounts with the discretion to distribute or not distribute your beneficiary's inheritance depending on the situation. SRT assets are not considered marital assets subject to division in a divorce. In addition, the trustee cannot be forced to make distributions that would disqualify a disabled beneficiary from receiving needed benefits and a beneficiary's creditors cannot reach the trust assets unless and until a distribution is made to the beneficiary. 

 

A properly-drafted SRT provides the tax benefits of an IRA and the asset protection of a trust—the best of both worlds. This option provides a level of control and protection that other estate planning vehicles may not offer. Contact us at Great Lakes Family Probate and Estates today to discuss how you and your beneficiaries can benefit from an SRT. 

About the Author

Niki M. Sturm

Niki M. Sturm is an associate attorney at Great Lakes Family Probate & Estates, where she brings over 25 years of experience in the financial services industry to the estate planning and probate practice. With a deep understanding of the administration side of implementing clients' estate plans, ...

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