Retirement plans are the least understood and most neglected part of estate planning. Historically, parents often left their tax-deferred retirement accounts to their children outright—free from trust. In other words, they named their children as direct beneficiaries of these accounts.
This traditional method of dealing with retirement accounts often results in some unintended consequences. For example:
- A child, without the proper guidance of a trust, decides to cash in the retirement account and is subjected to massive and virtually immediate tax liabilities.
- A child, without the proper guidance of a trust, loses out on decades of tax-deferred growth opportunities afforded to him by the IRS.
- A child, without the added asset protection of a trust, loses the retirement account balance to divorce, creditors, or predators.
- A child is a minor or is incapacitated at the time of the parent's death, resulting in the need to probate this otherwise non-probate asset.
These unintended consequences can be easily avoided by leaving your retirement account to your child (or grandchild) in a specialized IRA legacy trust—a trust that comports with all of the IRS requirements for your child to stretch out the tax-deferred growth in the retirement account over decades. This trust further provides your child with a degree of asset protection otherwise unavailable when a child is named as a direct beneficiary.
We work with clients to make their retirement plans part of their comprehensive estate plans. Beside counseling clients on the pitfalls associated with transferring retirement monies via beneficiary designations, we will work with your advisors to provide sensible and practical options to optimize the transfer of these hard-earned assets.