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Advantages of a Standalone Retirement Trust

June 22, 2015 Douglas Davis

Over the past ten years, Individual Retirement Accounts (IRAs) have become the primary tool for many people to manage their individual wealth. Because of the amount of money put into these accounts and their financial impact in people’s lives, controlling and protecting these accounts is more important than ever. One way to manage an IRA is by establishing a Standalone Retirement Trust (SRT) as the designated beneficiary for traditional or Roth IRAs.

What are the advantages to establishing a Standalone Retirement Trust?

  • The trust will alert beneficiaries to the fact that the IRAs need special treatment and shouldn’t be cashed out immediately as there may be significant adverse tax consequences.
  • An SRT allows “maximum stretch” for Required Minimum Distributions (RMDs) of income following the death of the owner. “Maximum stretch” means the beneficiary of the funds can pay the income tax over a longer period of time, rather than immediately upon the death of the owner. This allows the principal to grow quicker and lessens the immediate tax burden.
  • It provides asset protection of the account principal by avoiding the possibility of exposure because of a spendthrift beneficiary, or as a result of a divorce, or the actions of a creditor or predator.
  • It provides protection of the income for the beneficiary in situations involving government needs-based benefits.
  • It provides for a surviving spouse and children from a prior marriage in blended families.
  • Allows the owner to determine succession and controls against the unintended diversion of the account by the untimely death of intended beneficiaries.
  • Allows generation-skipping benefits so that the IRA will not be subject to estate tax when passed down from a child to a grandchild.
  • Avoids confusion and the loss of intended benefits because the trust provisions in the SRT are not part of a larger, more comprehensive trust containing provisions that conflict with the Internal Revenue Code and regulations specific to IRA benefits.

If any of these advantages is desired, it is vital to do two things:

  1. Have a trust prepared by a qualified attorney that includes properly worded provisions which follow technical IRS rules regarding IRA benefits, and
  2. At the custodial level, properly designate the separate sub-trusts of the SRT as the IRA beneficiary.

Most standard IRA beneficiary forms will not satisfy the second requirement and most trusts, whether living trusts or testamentary trusts, fail to satisfy the first requirement. Because Revocable Living Trusts normally include beneficiaries and provisions which must be differentiated from IRA-related beneficiaries and provisions, drafting an “all-in-one” trust invites confusion and worse, creates substantial risk that your intentions will fail. In those situations an SRT is the perfect solution for providing maximum protection for beneficiaries and for obtaining maximum tax benefits from the IRA stretch.