What Is the Purpose of a Retirement Trust?
Our Team Clears Up the Confusion
There are three distinguishing features of the Life Plan: to provide Disability Protection, Reduce Taxes, and Increase Asset Protection. Retirement accounts present unique challenges in accomplishing these goals due to some complicated withdrawal rules and the serious consequences of violating those rules. Let’s review some of these rules regarding the withdrawal requirements so you can get a better feel for the complexity involved. The IRS has divided the beneficiaries of an inherited retirement account into three categories:
Of course, there is an exception if the deceased owner of the retirement account was taking (or should have been taking) the required minimum distributions. For the first nine years after the decedent’s death, the beneficiary must withdraw at least the required minimum distribution as calculated using IRS tables and based on the beneficiary’s current age. In year 10, the entire balance of the retirement account must be withdrawn by the beneficiary. Naming a Retirement Trust as the beneficiary of a retirement account doesn’t change those rules. Consistent with the Life Plan goals, the purpose of the Retirement Trust is to provide Disability Protection, Reduce Taxes, and Increase Asset Protection. As an example, if the beneficiary
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Non-Designated Beneficiaries Eligible Designated Beneficiaries Non-Eligible Designated Beneficiaries
is chronically disabled, a minor, or an adult who needs a few more years of experience before they are ready to take charge of their
Non-Designated Beneficiaries — are living trusts, estates, and charities. That portion of the retirement account that designates any of these three beneficiaries will trigger the “five-year rule” as it applies to the portion of the retirement account so designated. Consequently, that share must be withdrawn from the retirement account within five years of the decedent’s death.
inheritance, the IRS rules don’t provide for the administration of the funds, the Retirement Trust does.
If the beneficiary is an adult, not disabled, and financially mature, there is always the risk that a lawsuit or divorce can put the retirement account at risk. Contrary to popular belief, the funds in an inherited retirement account are not immune from creditor claims (e.g., lawsuits, divorce, bankruptcy). To make matters worse, claims satisfied from a retirement account place the tax burden on the named beneficiary of the account, even though the beneficiary did not receive the funds from the retirement account. Let me repeat that, the beneficiary can lose the funds in the retirement account and end up paying the tax on funds that were never received. The IRS rules don’t address that problem, the Retirement Trust does. In a nutshell, the Retirement Trust does not change the requirements for withdrawing funds from a retirement account; the Retirement Trust protects the funds withdrawn from the retirement accounts.
Eligible Designated Beneficiaries — EDBs include the spouse of the deceased retirement account owner, beneficiaries who are not more than 10 years younger than the deceased owner, chronically disabled beneficiaries, and children under the age of 21. However, once the child reaches age 21, the
child becomes a non-EDB. EDBs have the option to withdraw the funds from the retirement account based on the beneficiary’s life expectancy.
Non-Eligible Designated Beneficiaries — These are all other beneficiary designations, and they must withdraw the entire inherited retirement account within 10 years of the death of the original retirement account owner. However, the beneficiary is not required to take required minimum distributions during the 10-year period. The beneficiary can wait until the end of the 10-year period to withdraw the funds.
2 PrestonEstatePlanning.com
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