Retirement funds are likely one of the main components of your client’s estate plan. A standalone retirement trust (SRT) is a useful tool that can protect these funds by allowing your client to direct the manner in which they are distributed after the client dies. You can serve your clients well by explaining how an SRT works and how much value it can add to their estate plans.
Understanding Standalone Retirement Trusts
An SRT is purpose-built to be named as the recipient of your client’s individual retirement account (IRA) or 401(k). After the client dies, the unused retirement proceeds will fund the SRT, providing several practical and tax-related advantages.
Instead of the entire amount going directly to the beneficiary in regular payments or a lump sum, the trustee of the SRT distributes the funds in accordance with the client’s wishes. Distributions can take place in the future—for example, on the beneficiary’s twenty-fifth birthday. This may be attractive to a client who fears that funds could be squandered by a beneficiary who is not yet mature enough to manage the funds properly. Distribution through an SRT can also avoid the accelerated tax on a lump-sum distribution.
An SRT may be particularly useful when the client leaves the retirement proceeds to a nonspouse beneficiary. Before the SECURE Act of 2019, many nonspouses could stretch inherited retirement account distributions over their entire remaining expected lifetimes. However, that is no longer the case—most nonspouse beneficiaries can only stretch distributions over ten years. An SRT provides something of a workaround: although it cannot alter the time within which the assets must be withdrawn from the plan, it allows the client to set the timeline for distributions out of the trust—and into the beneficiary’s hands—intentionally.
SRTs can also provide the beneficiary with some protection from creditors. Currently, the US Supreme Court’s 2014 decision in Clark v. Rameker holds that directly inherited IRAs are not considered retirement funds that would be exempt from a beneficiary’s bankruptcy estate. An SRT can shield retirement funds by potentially keeping them in trust for the beneficiary.
Additionally, SRTs may simplify the separation of the retirement assets from the nonretirement assets, since the retirement assets may be subject to different dispositive provisions and need to be administered separately.
Is an SRT Right for Your Client?
Before advising a client on the benefits of an SRT, you must determine if an SRT is the right option for the client’s estate plan. This entails having a thorough understanding of the family’s overall financial situation and the value of the client’s retirement accounts. SRTs may be most valuable to clients with large retirement accounts or where the intended recipients of the retirement assets are different from the recipients of the client’s other assets. If the client’s retirement assets and other assets will be distributed to the same recipient and the retirement assets are not substantial, it may make more sense to include appropriate provisions in a revocable living trust so that it (or its subtrust) will be the beneficiary of the client’s retirement accounts.
Determining whether an SRT is a good fit for a client also requires understanding the client’s dispositive wishes and concerns. You may need to have a conversation with your client about the intended beneficiaries, tactfully discerning whether any of them might have the propensity to waste your client’s money (for example, with a gambling or drug addiction), as you would with any estate planning client. Another delicate situation involves children from previous marriages. While your client may trust their spouse to disburse the funds according to their wishes, an SRT could alleviate uncertainty by including specific directions to make sure that the client’s children from a previous marriage inherit their share of the client’s retirement proceeds. Clients in these delicate situations may find an SRT particularly valuable.
While these conversations may be difficult, it is imperative to get a complete picture of a client’s financial and familial situation to make sure their plan provides the best protection and disbursement arrangements for them.
What to Tell Clients About SRTs
Once you get a better understanding of your client’s situation and determine the need for an SRT, you can then educate your client on the benefits of this estate planning tool. An SRT allows your client to protect beneficiaries, especially immature ones, from their own irresponsible spending choices. It also keeps the retirement funds safe from creditors, judgments, and bankruptcy. This includes divorces, as the client would not want funds earmarked for their children to be removed in a divorce action.
An SRT offers the following additional benefits:
- It allows the client (not the court) to control postdeath planning by using disclaimers and layered beneficiary designations.
- It preserves retirement assets for chronically ill and disabled beneficiaries while preserving the lifetime stretch as an exception to the SECURE Act.
- It allows the client to select a trustee who will oversee the distribution of funds, which is important when the funds are left to beneficiaries who are minors, legally incapacitated, or prone to spending or debt.
- It gives the client peace of mind knowing that their assets are secured for future generations.
Situations That Call for an SRT
There are several opportunities to talk to your client about using an SRT, such as when their estate plan has not been updated in many years. The Clark v. Rameker decision in 2014 and the SECURE Act of 2019 may affect your client’s situation, so that leaving their retirement benefits in an SRT would now be a wise choice. Older estate plans may no longer provide adequate protection from creditors, while the SECURE Act limited the group of people who can stretch retirement benefits over their expected lifetimes.
An SRT should also be considered when the client is
- rolling over a 401(k) into an IRA,
- converting from a traditional IRA to a Roth IRA,
- consolidating multiple IRAs into a single IRA,
- lacking a beneficiary or contingency beneficiary designation,
- naming a nonspouse as the primary beneficiary, or
- leaving assets in a trust for a disabled beneficiary.
Learn More About Retirement Planning
You can learn more about SRTs and other estate planning tools at WealthCounsel’s Retirement Planning Workshop, April 7 and 8. Natalie Choate, Esq., author of Life and Death Planning for Retirement Benefits, will conduct this seminar, and other events are available before and after the workshop. Click here to reserve your spot.