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Most people want to leave something for their children or heirs after they pass away but doing so can be tricky and complicated. You do not want taxes eating up the assets or exposing them to creditors, being squandered by irresponsible beneficiaries or jeopardizing a special needs heir’s right to public benefits. One way to accomplish this is by setting up a “Stand-Alone Retirement Trust Account.” This is a complicated type of trust but an essential part of elder law and estate planning.
For many people, their retirement plans include an IRA with children or spouses named as beneficiaries. As the IRA grows, the principal remains tax-free until you begin withdrawing from it. If you are still alive at age 70 ½, you must begin withdrawing at least minimum amounts at this time. When you pass away, the remaining assets are distributed to your beneficiaries. However, there are pitfalls that most people are totally unaware of and which would shock them if brought to their attention. This is one reason why a stand-alone trust may be a valuable tool in your estate plan.
Beware of Hidden Adverse Consequences
When you pass away and leave an IRA, your named beneficiary(ies) can elect to take a lump sum or check for the total amount or roll the funds over into their own or inherited IRAs (the same holds true for a 401K, except add the designation FBO {for benefit of} your beneficiary trust). The problem with this scenario is that it has numerous disadvantages:
- The funds are vulnerable and can be taken by your beneficiaries’ creditors or even ex-spouses
- If the beneficiary is a special needs individual, he or she can lose public benefits
- If you name your spouse, then he or she can name whomever they wish to name as other beneficiaries, including a new spouse
- A beneficiary can waste the funds on gambling or other irresponsible spending
- A lump sum withdrawal has substantial tax consequences
Another unusual and aggravating consequence is that if a creditor does attach or claim the IRA funds, the beneficiary remains responsible for the taxes on the withdrawals even though the beneficiary derived no direct benefit. If there are estate taxes owed, the funds from the account can also be used to pay them.
Trust as Beneficiary
An experienced and knowledgeable elder law attorney in conjunction with an experienced CPA familiar with Estate Planning (not all are) can advise you on how to avoid a nightmare like this by setting up a stand-along retirement trust account. By naming a trust as the beneficiary of the IRA, you have considerably more control over the distribution of the assets. These include:
- Carefully distributes the assets based on need and your specific instructions, if any as indicated in the trust
- Prevents mismanagement of the trust funds
- Allows a special needs person in an accumulation trust to receive funds without jeopardizing continued receipt of government benefits
- You need not name a guardian for minor beneficiaries as the trust is the beneficiary
An accumulation trust is a form of stand-alone trust where the trustee is directed to accumulate funds from the sale of trust assets until a specified time or condition arises for the trust assets to be distributed.
Stand-along retirement trust accounts are complicated and you should not attempt to create one yourself in a will or other instrument since you risk losing substantial amounts of your assets that your heirs could have enjoyed if done properly and according to Massachusetts law. Have an elder law lawyer draft one for you while consulting with your experienced CPA who is familiar with Estate Planning.
Consult Elder Law Lawyer Patricia Bloom-McDonald
Your funds need to be protected and distributed according to your intentions and with minimal tax consequences. By having your estate plan revised and/or created by elder law lawyer Patricia Bloom-McDonald, you can be assured that your retirement plans are carefully crafted so that your hard-earned funds are distributed to the heirs you intend to benefit with a minimum of court or IRS involvement and are safe from creditors. Call her office today for a consultation about your estate plan.