Your 401K or IRA may be your largest asset. Although these accounts were designed to provide additional income during your retirement, many people leave substantial amounts in their retirement accounts at their death. You can simply designate a beneficiary for these accounts. But there are several reasons why you may wish to provide some additional protections for your beneficiaries.
You have substantial amounts. The more you have in your account, the more likely you will want to add protections. For small accounts, the benefits of the protections may not be worth the additional hassle of administering a trust. However, you should remember that in many cases, your beneficiaries will simply cash in the account, pay the taxes, and spend the money as they choose.
You believe your beneficiary may waste the funds. If you are concerned about you’re your beneficiary will spend the inheritance, you should leave your retirement accounts in trust so you can provide oversight and instruction on how much they receive and when they receive it.
You are concerned about lawsuits, divorce, or other possible legal actions. Inherited IRAs have very good creditor protection in North Carolina. However, required minimum distributions will not be protected. Also, your beneficiary is not forced to leave the funds in the IRA.
You have beneficiaries who receive assistance. If one of your beneficiaries receives, or may qualify for, a need-based governmental assistance program, it is important to know that inheriting from an IRA may cause them to lose those benefits. A trust designed specifically to receive these assets can avoid disqualification.
You are remarried and have children from a previous marriage. If you are remarried and have children from a previous marriage, your spouse could intentionally or unintentionally disinherit your children. You can avoid this by naming the spouse as a lifetime beneficiary of a trust and then having assets pass onto your children after his or her death.
Any trust that is the beneficiary of a retirement account must be designed to hold these accounts. If the trust does not qualify as a designated beneficiary, your beneficiaries will receive the benefits of the trust, but may lose the ability to defer income tax on the account.
You have worked hard to save the money in your retirement accounts. They provide you with the peace of mind that you have a safety net. You have the opportunity to ensure that these accounts can serve the same purpose for your beneficiaries.