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RETIREMENT ACCOUNT TRUSTS – Part 2

by Thomas D. Begley, Jr., CELA

Separate Trust

A separate trust designed specifically to control the retirement account is recommended. It is best that the trust not be part of a revocable living trust or any other trust. A “standalone retirement trust” is preferred.

Professional Trustee

When an IRA is paid to a standalone retirement trust or any other trust, it is important to consider a professional trustee. The rules regarding inherited retirement accounts are complex and family member trustees are often unfamiliar with them. This could cause a loss of important tax benefits. Most family members do not understand the rules regarding required minimum distributions (RMDs), conduit trusts or accumulation trusts. This could cause loss of important tax benefits. If the retirement account is $500,000 or more, it usually makes more sense to name a professional trustee. The professional trustee understands the tax rules and has investment expertise.

A family member could be named as trust protector. A trust protector has the right to monitor the performance of the professional trustee and to remove and replace the trustee with another professional trustee, if the trust protector is not satisfied with the performance of the trustee.

Trust Protector

Under an IRA trust a trust protector can be appointed. The trust protector must be unrelated by blood to the trust beneficiary but may have a personal relationship, such as financial advisor, attorney, CPA, or friend. The trust protector can change a conduit trust to an accumulation trust.   This gives the trustee the discretion to accumulate funds.[1]

Conclusion

As Americans rely less on the availability of work-related pensions for their retirement, more of their wealth is found in the tax-deferred retirement accounts that they have funded over the years. As the estate tax exemption grows and becomes less of a concern for most Americans, it becomes increasingly important to understand and plan for minimization of the income taxes that are ultimately payable with respect to these tax-deferred accounts while at the same time maximizing family wealth transfer goals. The standalone IRA Trust is sufficiently flexible that it allows most people to balance their tax and family goals well, offering opportunities for creditor and other beneficiary protections, protection for special needs beneficiaries and spousal planning as well as the possibility of professional management to assist in investing and minimizing income taxes for the beneficiaries.

[1] P.L.R. 200537044; Harvey B. Wallace, II, Retirement Benefits Planning Update, Probate and Property, American Bar Association (May-June 2006); Wealth Preservation Update, Morris Law Group (Mar. 2007), www.law-morris.com.

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