Your Revocable Living Trust and Retirement Plans

I recently read an article in the Arizona SE Valley Living Newspaper about retirement accounts and revocable living trusts. The author of the article is a CPA and holds himself out to be a tax expert. After reading the article I came to the realization that there are a lot of misconceptions out there, by professionals and laymen alike, about revocable living trusts and how they work with one’s retirement accounts. I decided it was time to set the record straight.

In the article mentioned above, the author made a statement that the major reason families create a living trust is to avoid probate and that an IRA does the same thing. An living trust does avoid probate, but it also does so much more if it is set up correctly, things that an IRA all by itself will not do. The living trust can avoid conservatorships and guardianships, it can protect the assets from divorce and creditors and long term care spend down, it can minimize or avoid state and federal estate taxes, it can protect assets from spendthrift beneficiaries, and it can ensure that any special needs beneficiaries will not become disqualified from receiving disability benefits when you die.  It is true that an IRA can avoid probate, but that is true only so long as the beneficiaries you have listed on the IRA do not predecease you. If that were to happen and you had failed to update your beneficiary designations, the IRA will go through probate.

Another assertion that is commonly made is that you cannot have the living trust be the beneficiary of your IRA or other retirement accounts; this is not an accurate statement. You can have the living trust be the beneficiary of your IRA.  Most financial planners will say that if you make the living trust the beneficiary of your IRA then you eliminate the possibility of the beneficiary being able to stretch out the IRA over their life expectancy, this is also not a correct statement. If your trust is a “Qualified Trust” or “See Through Trust,” as some call it, then you are able to have the beneficiary of the living trust stretch the IRA out over their life expectancy, allowing the IRA to continue to grow income tax free.

 Finally, the last assertion made in this article that I would like to correct is their claim that the living trust does not provide any asset protection. This statement is as false as they come. It is true that while the trustor is alive the living trust does not protect the assets in the living trust from the trustor’s creditors. However, any good estate planning attorney knows that if the trust is properly drafted, when the trustor dies the trust can be set up to distribute the trust assets to the beneficiaries in the form of a beneficiary trust.  This beneficiary trust will then allow for spendthrift protection, creditor protection, divorce protection, and long term care spend down protection for the beneficiaries of the living trust.

The IRA is a great investment tool. It should work in conjunction with your living trust, not as a substitute to your living trust, which is what the author in the newspaper article recommends. If your living trust is set up properly, upon your death the IRA will pay out to the beneficiaries of your living trust and the will be protected from the creditors of your beneficiaries, any divorces your beneficiaries go through and any long term care spend down requirements.  This method also allows you to dictate how that IRA will be utilized and allows your beneficiaries to stretch out the IRA over their life expectancy.  In the alternative, if you were to name your children as the beneficiaries of you IRA, instead of the living trust, then they will get to stretch it out over their life time, as with a living trust, but they will lose the protections that the living trust would otherwise give to them.

This area of the law is highly technical and is not an area that is understood by most professionals, especially those that do not have experience in estate planning law. It is very important that if you have a retirement account with substantial assets in it that you seek the advice of an estate planning attorney that can help you understand how the estate plan and retirement account can work together to meet your estate planning goals.

Contributed by MH attorney and partner David T. Eastman

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At Morris Hall, we have focused our legal practice on estate planning for over 40 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, powers of attorney, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale,Tucson, Prescott, Flagstaff and Arrowhead.    Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.