Would a Retirement Trust Benefit Your Heirs and Protect Your IRA?

In recent years, we have seen a significant increase in the value of our client’s IRA and retirement accounts. It is common to see many IRA’s well over $200,000, and even exceeding $1,000,000. These accounts represent years of saving and smart tax-deferred investing. For many clients, these retirement accounts will be a life-changing legacy for their beneficiaries.
However, a few years ago, the U.S. Supreme Court ruled that the IRA’s you leave to your children are not protected from their creditors’ claims. In other words, leaving your hard-earned IRA to beneficiaries who may not be able to handle money, or who may someday face lawsuits, bankruptcy proceedings, or failed marriages, can be disastrous. But now, Retirement Trusts may offer protections for the inheriting children, and protect the IRA’s and retirement accounts.
Retirement assets, such as IRAs, are passed by beneficiary designations. For example, an IRA owner may name their spouse as the primary beneficiary, and the children as the secondary beneficiaries. In certain scenarios, however, it is advantageous to name a specialized retirement trust—rather than the children—as the designated beneficiary. This specific type of trust is designed to allow the retirement assets to grow tax deferred, and protect the assets from future creditors of the child. Otherwise, if a child is named directly as the beneficiary, the child may cash out the IRA (and pay tremendous tax), spend the IRA unwisely, or lose the retirement assets due to creditors, bankruptcy’s, lawsuits, etc.
The three goals of these specialized trusts are: 1) prevent the beneficiary from cashing out the IRA, thereby allowing the IRA to grow in a tax-sheltered manner; 2) provide creditor protection so the IRA is not lost due to creditors, and 3) provide structure for how retirement funds may be used.
For many people, a Retirement Trust is far better, and offers far more protection than simply naming a child as the beneficiary. For those with large retirement accounts, this type of specialized trust may protect the IRA, as well as future generations.
For more information, please contact the McNamara Law Firm at 661-287-3260 or www.themcnamaralawfirm.com.