What is a Retirement Trust and Why Would You Set One Up?

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Paul Sundin, CPA

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You are probably familiar with retirement plans from the employee perspective; perhaps you’ve had the opportunity to join a 401(k) plan through your work, or have family members who receive benefits from a pension plan, or perhaps you even follow the latest trends in retirement planning and attempts to regulate the industry through legislation.

However, especially in the event of a second marriage or in light of other potential concerns, the protection and certainty of a marital trust will outweigh the desire for a spousal rollover. If qualification for the marital deduction from estate tax is desired, detailed rules must be adhered to, and the governing instrument must contain specific, technical language. 

In effect, both the retirement plan and the trust must qualify for the marital deduction. If the surviving spouse’s life expectancy is desired for determining minimum required distributions, the trust must also qualify as a see-through trust. 

Naming a credit shelter trust as beneficiary

There are scenarios in which it could make sense for a credit shelter trust or estate tax-sheltered trust to be named a retirement plan beneficiary. Doing so would typically only be a consideration if the participant did not have sufficient other assets to fully utilize their remaining federal estate tax exemption. 

Of course, with the portability of the federal estate tax exemption as an option, naming a credit shelter trust as the beneficiary of a retirement plan is less appealing. If naming the credit shelter trust as beneficiary, the client will need to decide whether the trust should be designed as a see-through trust so that there is a designated beneficiary for life expectancy purposes. 

Naming a trust for creditor protection and tax benefits

Clients may also wish to consider naming a trust as a beneficiary of a retirement plan to take advantage of the protective benefits of trusts. A recent U.S. Supreme Court case held that an inherited IRA is not exempt under federal bankruptcy laws. Accordingly, designating an individual beneficiary of an IRA may subject the inherited account to the claims of the beneficiary’s creditors. 

A trust can be designed to protect from creditors and divorcing spouses, a common concern for many clients. When leaving assets, including retirement accounts, to children and grandchildren, a trust is often utilized to take advantage of these protective benefits. 

Similarly, a trust could be used to take advantage of the client’s generation-skipping tax exemption. A trust for a grandchild that qualifies as a see-through trust would maximize the stretch benefits of the plan.

What is a Retirement Trust?

As you can see, a retirement trust can be a great option for many people with large retirement accounts.

The retirement plan industry is full of complexity, codes, and caveats. Professionals in retirement plan administration must stay on top of frequently changing laws and guidelines, navigate an intricate web of definitions, and develop an understanding of plans that reaches from the minutia of employee birth dates to the broad goals of plan design for the employer.

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