Should a Retirement Account be in a Trust? (Pros and Cons)

Should A Retirement Account Be In A Trust (Pros And Cons)

Thanks to a 2014 move by the Supreme Court, you can place your retirement accounts—namely Roth IRAs and 401(k) accounts—into living trusts. It’s not easy, but it’s something that you can do.

A retirement trust is where you assign a retirement account that is in your name to a living trust, which can be left to your family or beneficiaries.

Since trust allows you to allocate funds for others, such as your children or spouse, the retirement account can fund that.

The reason that this is so groundbreaking is that you can now protect your retirement accounts from being claimed for other reasons. You might be screwed, by the beneficiary of the account won’t be (unless they’re in bankruptcy, which is another issue entirely).

If you don’t mind your retirement fund going to someone else, such as if you’re in the throes of a tough medical diagnosis or your investments have paid off and you don’t need the retirement fund, you can make the beneficiary a trust.

That means that once it reaches the maturity date of 59½ (when you are that old), the trust is in control of that money. It’s not your money anymore; it’s like it switches hands without ever being touched by you.

How to Make a New Trust in Your Name

financial advisory and lawyer

It’s important to have a financial advisor. It’s important to have a lawyer. Do you need either of them to actually make a new trust in your name? No, but it’s good to have them.

To create a trust, this is what you need to do:

  • Trustees, or managers of the trust. This could also be you; you can create it, and be in total 100% control of it at the same time, though it’s not the most common practice.
  • A designated person (who is not you) will take over as the trustee in the event of your death or inability. You need to get this person’s agreement in writing in one way or another.
  • A list of names (children, spouse, in-laws, siblings, etc.) of all who will receive property or a portion of the property that is located in your trust. This is not the same as a last will and testament.
  • Lastly, a fund manager, or trust manager who will be in charge of the property in your trust and not liquid or financial assets.

I want to emphasize this very clearly: you still need to hire someone to finalize this process, because you are not enough to do this on your own. You don’t need to spend four figures on a lawyer or fund manager though; you just need to visit a notary.

Notaries legalize documents and make them actually binding. You need this, otherwise you can’t prove that you ever created a trust or contributed a retirement account to the said trust.

How to Connect Your Retirement Account with a Trust

Retirement Account With A Trust

Now comes the hard part. You have to actually connect these two things together.

You absolutely need a trustee. You can’t just have it go towards a corporation, business, or even a charity. At that point, it’s treated as not having a beneficiary at all, and there’s no payout.

You need to ensure your trust is under the local law, and is irrevocable. It must be irrevocable upon death, and the money then goes to easily identifiable people listed on the trust, with legible names that are easy to communicate with.

Being transparent on this is going to prevent you from probate.

In order to link these properly, you have to name your trust as the beneficiary—not the individuals that the trust lists as beneficiaries. When the retirement account is then given to the trust, the trust fund manager gives the money to the beneficiaries, thus completing the cycle.

Retirement plans are important, like a Roth IRA or a 401(k), which is why it’s more important to link it to trust to take care of multiple persons, or even just one person, than having it go directly to an individual without this process.

Most people don’t know how to handle immediate wealth, and they will not do the right thing with it. They will often liquidate it, which can incur high 10% fees on a Roth IRA, and then spend it on unnecessary items if the maturity date has not been reached.

What Asset Protection Exists for Retirement Account Trusts?

liability on taxes

Asset protection through a trust essentially guarantees a monthly paycheck or payout to beneficiaries over a long period of time. This ensures they don’t spend it all before they really should.

When someone is given a high amount of money, like your entire retirement account, they’re taxed on it right away. It’s an income to them, and they have to report it. Problem is, most people don’t know how to prepare for those taxes. They don’t know to put the money aside.

Even if you do your best to prepare them, a structured payment program through a trust offers them limited tax liability. It won’t throw them into a whole new tax bracket, it might actually keep them within their tax bracket and limit their write-offs to save them more money over time.

Invest Smarter, Live Better

Linking your retirement account with a trust isn’t the easiest thing, but it can have major benefits going down the line.

These can shield your beneficiaries from bad financial downfalls that might come after you; but do remember that generally speaking, you surrender your retirement account when you put it into a trust. You can be the trustor, but it gets tricky and you can’t avoid taxes by doing this—it’s not designed for that.

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