Business owners with high-value retirement accounts should consider taking measures such as a retirement plan trust to protect that wealth after their deaths. While listing a spouse as a primary beneficiary for your 401(k) or other retirement accounts is typically recommended given the benefits of a spousal rollover, indicating children as contingent beneficiaries won’t always ensure that they receive the full amount after your death and can have other unintended consequences, for example, if a child predeceases you with surviving children.
Setting up trusts to serve as contingent beneficiaries of retirement accounts helps ensure the safe passage of retirement accounts to beneficiaries and protects them from bankruptcy, divorce, and other risks.
What Is a Retirement Trust?
You’ve likely listed your spouse as the primary beneficiary of your retirement accounts and your children as the contingent beneficiaries. With these beneficiary designations, your spouse would be the first to receive your remaining retirement assets after your death, which is typically recommended to retain the benefits of the spousal rollover. However, if your spouse was no longer living or disclaims them, your children would be next in line.
Several issues could impact this wealth transition to your children after your death.
- In the event of your child’s death, your assets could pass to his or her surviving spouse who may remarry and further pass your retirement assets outside of your family.
- In a divorce, a child’s spouse could take some of the retirement assets.
- Your retirement assets could be subject to a child’s bankruptcy.
- A child’s medical event could drain your retirement assets
- A business lawsuit or other litigious action could draw funds from your retirement accounts
You also have little control over how beneficiaries use those funds after your death. Should the retirement funds pass to minor children or grandchildren, the court may have to appoint a guardian to handle the money instead, with the assets passing outright to such children or grandchildren at age 18, far younger than you may wish.
A retirement trust is an estate planning tool that can act as the new beneficiary of your retirement accounts if you are not married or if your spouse predeceases you. This gives you greater control over how and when beneficiaries receive assets from the trust and protects those assets from creditors and other risks.
Using a Retirement Trust for Beneficiary Management
Properly drafted retirement plan trusts qualify as see-through” trusts (which can be accumulation or conduit trusts). These trusts come with a few requirements:
- They must be irrevocable upon your death.
- All beneficiaries must be easily identifiable, eligible and named.
- They must be legal under state law.
Setting up a retirement plan trust with the help of an asset protection attorney ensures that you structure your trust correctly.
You can choose to name your children as the trustees of the retirement trust if they are old enough and will responsibly manage this money. Otherwise, you can designate someone else to manage the trust.
Once you have finished setting up the trust, you must simply update your beneficiary designations for your retirement accounts. You may be able to do so through your provider’s online portal or by calling your account manager.
Typically, you will retain your spouse as the primary beneficiary, and list the trust as the contingent beneficiary, passing the retirement accounts to the trust if your spouse predeceases you. If you are married, we recommend you and your spouse consider setting up a retirement plan trust.
Pros and Cons of Retirement Trusts
Using trusts for managing wealth in retirement and after death poses many benefits. With a retirement trust, you can:
- Pass assets directly to the trust tax-free upon your death (though the trust, whether a see-through conduit or accumulation trust is still subject to required minimum distributions rules and such distributions are taxable)
- Protect inherited retirement accounts from lawsuits, creditors, and divorce proceedings
- Control who will manage account funds after your death
- Prevent a spendthrift beneficiary from squandering their inheritance money
Create Your Trust With the Help of a Qualified Legal Team
Talking to an estate planning attorney can help you determine whether a retirement trust makes sense for your goals.
At Wilson Ratledge, PLLC, we can help you create a trust that protects your wealth and stands up to legal scrutiny. We can also assist with tax planning, business law, and more. Request a consultation today to learn how we can serve you.