Retirement Plan Trusts

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 According to the Investment Company Institute, as of June 30, 2024, retirement assets accounted for 32 percent of all household financial assets in the United States.  In an effort to encourage its citizens to save, the government of the United States has made those retirement assets that qualify under the Employee Retirement Income Security Act (ERISA), protected from creditors, civil lawsuits, and even bankruptcy.  

However, once these retirement plan assets are distributed to a beneficiary, they lose these special protections. In order to protect these assets from creditors, the estate planning community utilizes a special trust (known as a Standalone Retirement Trust or SRT) to provide a wall of separation between the trust assets and a beneficiary’s creditors and essentially maintain the protection that would otherwise be lost after the transfer.

Without careful consideration, passing the Retirement Account to a beneficiary without a Standalone Retirement Trust may result in a host of other problems:

• When a Retirement Account is left outright to a beneficiary, the original Retirement Account owner loses control of who will eventually inherit the Retirement Account assets after the death of the first beneficiary. This can be a problem with blended families, or a mixed family as a result of a second marriage.
• The Retirement Account beneficiary may be too young, a spendthrift, or maybe incapacitated, unable to manage the Retirement Account funds.
•  A disabled beneficiary could lose state and federal government benefits upon receipt of Retirement Account funds.
• Lawsuits filed against a beneficiary or bankruptcy could result in the loss of the Retirement Account funds.
• If a beneficiary gets a divorce, the divorcing spouse could take the retirement assets.

At its core, a retirement trust allows a trustee to keep retirement assets in a trust. As a result, when the trustee receives distributions from a retirement account, they can determine when and how much of the funds are to be distributed to a beneficiary. This discretion allows a trustee to protect the assets when a beneficiary is going through a time of turmoil, such as a divorce, bankruptcy, or any other creditor issue.

Even if you have no current concerns about how your beneficiaries will manage the Retirement Account assets after your death, a retirement trust may protect your beneficiaries from unknown risks that may arise later. 

Advanced Services Law Group recommends Standalone Retirement Trusts to those clients with (i) retirement account assets of over $200,000, (ii) complex family situations, such as blended families, where ensuring that assets are distributed fairly and according to specific wishes is a priority, or (iii) in cases where clients have beneficiaries who are minors, financially irresponsible, or prone to high spending or debt.