Standalone Retirement Trusts

Increasingly, tax deferred retirement accounts such as 401(k)s, 403(b)s, SEPs and IRAs are a significant portion of people’s estates. Careful planning and handling of such accounts can make a big difference to the beneficiaries in the amount of benefit received. Because money coming out of such plans is taxed in the year it is received, and because tax rates increase as annual income increases, a lump sum distribution quickly hits the $35% tax bracket.

Stretching out the qualified retirement plan distributions over as long a time as is allowed accomplishes two favorable results:

  1. It allows for tax deferred growth inside the retirement account over the applicable distribution period, and
  2. It allows for smaller annual disbursements that are taxed at the lower tax bracket levels for people with lower incomes.

This “stretch” of income over a longer period of time can make a three to ten fold increase in the amount of benefit received.

There are different ways to accomplish the stretch. The most straightforward is to name specific humans, called designated beneficiaries or DBs for short, as beneficiaries on the plan’s beneficiary designation form and then make sure that each DB separates his or her account by September 30 of the year following the death of the owner of the retirement account. This allows each such separated DB to stretch minimum distribution payments out over his or her life expectancy according to the IRS Single Life Expectancy table.

So for example a 13 year old beneficiary could stretch out minimum distributions over their remaining 69.9 year life expectancy and receive more than ten times as much in benefits and be taxed in a lower bracket on that income.

However, problems can arise during the lifetime of the DB. A 13 year old DB would need a conservator appointed at some legal expense.  The DB  could become disabled and the income could disqualify them from much needed government benefits. The DB could have financial problems and the distributions would be accessible to creditors. A bankruptcy trustee could take an inherited retirement from a DB. A former spouse could take the distributions. The DB could take out the money improvidently and spend it foolishly. Such problems can be minimized with a properly drafted and administered standalone retirement trust.

A properly drafted and administered standalone retirement trust (SRT) can achieve the maximum stretch for the retirement funds, achieving the desirable tax deferred growth and the lower annual tax brackets. It can also protect against early improvident withdrawal by the beneficiary, preserve government benefits for a special needs beneficiary, and attachment by creditors or a bankruptcy trustee and claims of divorced spouses.

A properly drafted SRT establishes a clear focus on the tax savings and tax deferred growth of the retirement fund. This avoids confusion and co-mingling of retirement funds with other assets in a normal revocable living trust. It also provides for the appointment of a qualified trustee and successor trustees over the life of the retirement trust. This clarity of purpose and the independence of the trustee can provide a great return on the comparatively small investment it takes to set up a SRT.

A knowledgeable and qualified Utah attorney can help you set up an effective stand alone retirement trust that can allow for tax deferred growth and protect your beneficiaries from higher taxes and creditor aggression.