Standalone retirement account trusts should be considered by anyone who has accumulated large amounts in qualified retirement plans, such as IRAs or 401(k)s. Most of the time, these accounts consist of pre-tax contributions. Therefore, the distributions from these funds are subject to income tax. As a result of the tax-deferred growth within such accounts, the income tax liability can also be significant. The concern is how best to pass these assets onto your beneficiaries without triggering the enormous tax liability inherent in such assets.
Due to the attached income tax liability, it is often advisable to handle the retirement accounts proceeds separately from your non-tax-deferred assets via a standalone revocable living trust to receive the proceeds from the retirement accounts. These trusts, referred as “IRA inheritance trusts,” “retirement account trusts,” and other names, all refer to a vehicle designed to receive the proceeds from qualified retirement accounts and give the family an opportunity to benefit from deferred withdrawals and creditor protection, while the owner can control how these proceeds are distributed out to the beneficiaries and even restrict the use of the funds if necessary.
Careful planning for retirement accounts can ensure your beneficiaries’ inheritance is protected from divorce, lawsuits, bankruptcy, inexperience, and bad habits. That being said, planning for qualified retirement accounts is complex and improper planning can easily cause the loss of tax-deferral benefits, so a determination of whether a retirement account trust should be included with your estate plan can only be made by an experienced attorney.