San Diego Retirement Trust Attorney

How To Protect and Preserve Your Accounts When You’re Gone: Legacy Retirement Trust™ from San Diego Retirement Trust Attorney

We now have massive amounts of wealth in retirement plans, 401ks, Roth IRAs, Traditional IRA, SEP, Defined Benefit Plans, 457b, and so forth. The question is, what will happen to those accounts when you’re gone?

Some people are surprised to learn there are two potential problems with inherited retirement accounts:

  1. Except for Roth accounts, all other distributions from inherited retirement accounts are considered ordinary income and will be subject to both state and federal income tax upon distribution. What this means is that if you have over $500,000 in your retirement account and your child or other non-spouse beneficiary liquidates the account upon your death, they will lose over half of the account to taxes! The accounts are subject to estate and income taxes. In addition, many people are unaware that a non-spouse beneficiary must begin withdrawing the RMD—or required minimum distribution within one year of your death.
Beneficiaries have three options: 1) “stretch” the distributions over their life expectancy; 2) liquidate the entire account; or 3) withdraw all of the account within five years. Many beneficiaries are unaware of the rules and regulations and “mess up” the stretch by withdrawing more than the RMD and not electing the stretch.
  2. The other big problem with inherited retirement accounts is they are not protected from lawsuits or creditors. Following a landmark 2014 Supreme Court decision, the court held that once an account is inherited it is no longer considered a “retirement” account and thus, is not protected from creditors.

Enter the IRA Legacy Trust™ – a special irrevocable trust designed uniquely to become the beneficiary upon death of your retirement accounts. There are three big benefits of utilizing the Legacy Trust:

  1. Tax Savings – The IRA Legacy Trust can require that the beneficiaries “stretch” the account over their life expectancy. They would only pay tax on the required minimum distribution withdrawn each year, allowing the balance to grow tax deferred.
  2. Asset Protection – The Trust can be set up with a Trust Protector who can modify the Trust in the event of a lawsuit, bankruptcy or other legal issue. The minimum distributions instead of being passed through to the beneficiary can be accumulated in the Trust, protecting the account and the distributions from outside threats. The Trustee would not make withdrawals from the account to the beneficiary with the legal problem. Therefore, the account is safe and protected inside the irrevocable trust until the issue is resolved. Once resolved, the beneficiary can continue to receive the annual distributions.
  3. Generate Legacy Wealth – Einstein noted that there is an 8th wonder of the world – namely, compound interest. The withdrawal rate of younger beneficiaries will be low – depending upon the age, could be 1% or less each year. The balance of the account can continue to grow and compound tax free. Before you know it your million dollar account has doubled and you have multiplied your wealth tax deferred for future generations. We can run the numbers and you will see your lifetime withdrawals during retirement years, but your beneficiaries will enjoy increased wealth over their lifetimes.

Consider an IRA Legacy Trust™ to protect and preserve your hard earned wealth for future generations. Your San Diego Retirement Trust Attorney, KR Hess Law is glad to help.