When to Consider a Standalone Retirement Trust

A lot of my clients have most of their wealth in tax-deferred retirement accounts.   Although IRAs and 401Ks were meant to fund retirement, most people with large retirement accounts do not spend all of their retirement savings before death. Most of my clients who leave large retirement accounts at their death wish to continue the tax-deferred growth for as long as possible, pay the least amount of taxes, and protect their hard-earned savings from their beneficiaries’ creditors. This can be accomplished with a retirement trust.

Naming a trust as beneficiary of your retirement accounts will provide you with more control and more protections of your retirement savings than leaving them outright. Because trusts must meet stringent requirements in order to protect tax-deferred growth, it is usually best that the retirement accounts be left to specially-designed retirement trusts, known as Stand-Alone Retirement Trusts (“SRTs”). However, SRTs are not for everyone. You should consider a SRT if any of the following applies to you:

  • You and your spouse have combined retirement plans of $200,000 or more. At that level, it makes economic sense to use a SRT. The amount alone is not the only issue, and sometimes it makes sense for someone with a smaller retirement plan to use a SRT.  
  • You are concerned that your beneficiaries would not make good choices regarding distribution. If you would be concerned about giving your beneficiaries the amount in your retirement accounts with no instructions or oversight, you should consider a SRT.
  • You are concerned that a beneficiary could lose part of the inherited IRA in a divorce, bankruptcy, or lawsuit. This is especially true if one of your beneficiaries does not live in North Carolina.
  • One of your beneficiaries is a minor, is incapacitated, or may become incapacitated. One year’s worth of guardianship fees alone will likely cost more than the cost of establishing an SRT.
  • One of your beneficiaries receives or may qualify for a need-based governmental assistance program.  Inheriting the IRA may cause them to lose those governmental benefits. This is not just for elderly or incompetent beneficiaries. It may include things like school loans, scholarships, and grants.
  • You are in a second marriage and have children from a prior marriage. Your spouse could intentionally or unintentionally disinherit your children from the IRA after his or her death. You can name the trust with the spouse being a lifetime beneficiary, then leave it to your children.