IRA Trust Protection

Over the years, you have made sacrifices, followed a budget, read financial literature, listened to investment podcasts, and followed the advice of financial advisors in order to save money for your retirement.  In fact, as of December 31, 2022, data published by the Investment Company Institute (“ICI”) revealed that total U.S. retirement assets were $33.6 trillion and accounted for 30 percent of all U.S. household financial assets, with assets in individual retirement accounts (“IRAs”) totaling $11.5 trillion.

Bearing in mind that your IRA could be one of the largest assets you own, have you ever considered leaving your remaining IRA assets to a trust instead of individual beneficiaries at the time of your passing? If you ask yourself, why would I consider such a thing, perhaps you may be concerned about:

• limiting your beneficiary’s access to the entire inheritance all at once;
• protecting a beneficiary, such as your son or daughter, who you may think could get divorced and perhaps a claim could be made against your child’s inheritance;
• providing creditor protection to a beneficiary with a checkered past or employed in a highly litigious industry making that beneficiary subject to possible legal proceedings;
• shielding beneficiaries from themselves based on prior history of how they handle assets; or
• limiting bad decisions of beneficiaries by relying upon your trustee exercising financial prudence.

If any the above is of importance to you, creating a trust for your IRA may be the right thing for you since you can specify when and how your IRA assets are distributed to your beneficiaries.  You must be extra careful when creating this trust document, especially after the enaction of the SECURE Act and its amendment.

Any trust created for an IRA must contain see-through language, which is located within conduit and accumulation trusts.  Such trusts are designed to defer income tax payments from retirement accounts.  Conduit trusts are designed to pay out all distributions, including required mandatory distributions (“RMDs”) directly to the trust beneficiaries, with the beneficiaries paying the income taxes on the distributions. All the inherited IRA assets must be distributed to the beneficiary within the 10-year period following the death of the grantor. Post SECURE Act, conduit trusts no longer protect assets from creditors or beneficiaries themselves outside of the 10-year period.

Accumulation trusts provide the trustee with the choice in establishing whether to make or retain any distributions taken from the inherited IRA. This powerful choice enables trustees to decide if IRA assets should remain in trust protected from any creditors.  It also relieves the IRA owner’s concern of having beneficiaries receive assets either too soon or in too large an amount.  Unfortunately, accumulation trusts can possibly cause additional income taxation, especially if the distributions from the IRA are retained in the trust since trusts are taxed at the highest effective income tax rate much quicker than individuals.

In summary, in a conduit trust, the trustee must instantaneously distribute all available income and principal to the beneficiaries over a 10-year period.  In contrast, an accumulation trust allows the trustee to either accumulate the IRA assets or disburse.

Like any rules, there are exceptions for a spouse, minor children, and blended families. In any event, using either of these trusts for the distribution of your IRA assets may be highly beneficial to the IRA owner knowing that the owner’s legacy will be better safeguarded and that the beneficiaries are protected.