Providing Creditor Protection and Stretch-Out of Your Retirement Accounts for Your Children or Grandchildren continued..
In most cases, when the beneficiary is one or more generations younger than the original account holder, the lifetime value of the account is five or more times greater. This is the second major benefit of the trust, known as the deferral or stretch-out benefit. In Dr. Bob’s case, his retirement accounts channeled through his Retirement Protector Trust™ will likely yield over $7,250,000 to his children over his children’s lifetime if he and his wife died now. But since he is only in his 40s, his retirement accounts will likely grow in time and this effect will be compounded.
Lastly, the trust helps us better control who the retirement accounts will be passed to in the event a child dies before complete distribution of their share of the retirement accounts. We can craft provisions so that we can pass a child’s share to his or her children and, if they do not have children, their share can be passed on to your other children or grandchildren.
When the retirement plan laws were first set up, it was never the intent of the government that your retirement accounts be passed on to others. It was their intent that you consume your retirement accounts during your lifetime. However, we’ve identified opportunities to help pass these accounts to beneficiaries in a way that gives the beneficiary a much larger account value over their lifetime in a tax-deferred environment while protecting the accounts from the reach of creditors.
Now that we’ve evaluated the major benefits of this type of planning, let’s examine the mechanics of the Retirement Protector Trust™. After the trust is signed, the trust can be modified if it is drafted as a revocable trust. The trust can be drafted as an irrevocable or a revocable trust. It, however, needs to be irrevocable upon your death. This happens as an operation of law if the trust is a single grantor trust. It is highly recommended that the trust be a single grantor trust due to the many complexities in the tax code. Where there is a husband and wife, each should have their own Retirement Protector Trust™ because we do not know who will pass first and the spouse is usually the primary beneficiary and the retirement trust is the contingent beneficiary.
The next step after executing the trust is to fund the trust. Since only the beneficiary forms of the retirement accounts will list the trust as the beneficiary, there needs to be some asset presently owned by the trust to make it a valid and effective vehicle. This can be accomplished by adding a $10 bill to the back of the trust and listing $10 on the trust asset schedule.
Note that the trust does not own your retirement account. Retirement accounts can only be owned by a living breathing person or list a specially drafted trust as the beneficiary. There are a few other rules that must be met in order for the trust to be the beneficiary of your retirement account. They are (1) that the trust must be valid under state law; (2) the trust must be irrevocable or become irrevocable at the plan participant’s death; (3) the trust must contain “identifiable” beneficiaries; and (4) a copy of the trust must be provided to the plan administrator on or before October 31st in the year after the plan participant’s death.
To learn more about protecting your retirement account for your children with a Retirement Plan Trust, call (760) 448-2220 to schedule a time over the phone or in person with Brenda Geiger to discuss. You may also reach us directly through our contact page.
