As you are planning how to leave your IRA, 401(k), 403(b) or other qualified retirement accounts to your spouse, children, or other beneficiaries, consider setting up a separate Retirement Plan Trust.
Any trust that authorizes the trustee to handle the withdrawal of assets from a retirement account and distribution to a beneficiary must contain carefully drafted provisions to comply with requirements of the IRS Tax Code to successfully achieve the desired results. Generally, there are two basic ways to structure retirement asset management by a trustee. The “conduit trust” requires that the trustee immediately distribute all withdrawn amounts to the beneficiary. The “accumulation trust” gives the trustee discretion with regard to the timing of the distribution of withdrawn amounts to the beneficiary, so that the withdrawn amounts could accumulate in the trust. For certain types of beneficiaries, such as young children, it is desirable to accumulate, and for disabled individuals receiving governmental benefits, it is necessary to accumulate in order not to disqualify the beneficiary from governmental benefits.
A significant difference between conduit and accumulation trusts is the starting time for required minimum distributions from the retirement account. In the case of a conduit trust, withdrawals distributions don’t need to start until the year in which the plan participant, who set up the account and saved into it, would have turned 70 ½ years of age. That year, the beneficiary has to begin withdrawing funds at a rate based on the beneficiary’s life expectancy. The younger the beneficiary, the smaller the distributions. In the case of an accumulation trust, withdrawals from the retirement account to the trust need to begin the year following the plan participant’s death. The withdrawal rate will also be calculated based on the beneficiary’s life expectancy.
Conduit and accumulation trusts can be incorporated into a Will or revocable trust. However, to make use of the most sophisticated planning options, including special administrative powers for the trustee and a powerful role for a trust protector, to optimize the conveyance of the retirement accounts to beneficiaries, requires skilled drafting. Incorporation of such provisions into an estate planning document that is likely to be updated at some future time, possibly by another attorney who may not be familiar with the constantly evolving tax laws affecting retirement assets, could lead to failure of the intended plan.
By using a separate retirement plan trust, the risk of plan failure can be avoided. Furthermore, the strict drafting requirements for retirement assets may stifle the flexibility that could be included in the Will or revocable trust. A retirement trust could be drafted as a conduit trust, as an accumulation trust, or as a conduit trust that can be converted to an accumulation of trust following the plan participant’s death. Such a conversion could be desirable for certain beneficiary situations. For example, the accumulation trust structure would be desirable where a beneficiary’s distributions would be exposed to the beneficiary’s creditors. Since the trustee can accumulate the withdrawn amounts, those assets can be kept in the trust and protected. Another reason to consider a separate retirement plan trust would be the nature of the assets held in the retirement account. Thus, retirement accounts that hold business entities or real estate are best administered separately from the other assets of the estate. The use of a separate retirement plan trust would build a firewall between those accounts and the rest of your estate.
