Retirement accounts are commonly one of our clients’ largest assets. These retirement accounts represent the fruit of a lifetime of labor, years of tax-deferred appreciation, and what many hope will be a lasting legacy that will help their children/beneficiaries in the future.

However, many of our clients are concerned about how their retirement accounts are going to be distributed after they die and how much tax their heirs will have to pay on the accumulated growth.

The Basics: Naming beneficiaries (rather than using a Retirement Trust)

In its simplest form, you may choose to forgo planning and just name beneficiaries on your retirement account. This sounds easy. You fill out some forms, designate your beneficiary (or multiple beneficiaries) and after you die, the money in your account now belongs to them.

Why is this problematic?

Your beneficiary now has the option to either:

• stretch their required minimum distributions (“RMD”) out over their lifetime; or
• cash out your retirement account and pay taxes on any appreciation at a high rate of tax

Stretch the RMD – Upon your passing, a retirement account beneficiary can choose to move the funds into an inherited IRA and receive distributions over his/her lifetime. Your beneficiary will take out a required minimum distribution each year, allowing the funds to continue to grow over their lifetime. This provides your beneficiary with annual cash flow and a greater opportunity for your retirement to grow. This is what most of our clients hope their beneficiaries will do, however is not always the case.

Cash out immediately. Your beneficiary may instead choose to liquidate the retirement account. By doing this, the income tax on all the appreciation that has generated over the years becomes due. This can result in a large portion of your savings being remitted to the government in the form of tax.  Unfortunately, absent a Retirement trust, this is the more common result.

What does a Retirement Trust do and is it for me?

A properly drafted Retirement Trust offers the continued tax advantages of your existing retirement account with the added controls of a trust. With the Retirement Trust, your trustee ensures that the retirement account would continue to be managed and stretched over the beneficiary’s lifetime. In addition to avoiding extraordinary, accelerated, and avoidable income tax exposure, this approach maximizes the likelihood that assets will be available for future generations when the beneficiary passes away. It also has the added benefits of spendthrift, divorce and creditor protection for your beneficiaries.

If you have a retirement account and you would like to discuss your options to ensure it is distributed in accordance with your wishes, please call today for an appointment with one of our experienced estate and trust planning attorneys at 800-680-1717.

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