Using Trusts to Protect Retirement Account Assets

Many parents who leave retirement accounts to their children want to control how quickly their children run through the money. The three big concerns are contentious marriages, lawsuit-prone careers, and children with spendthrift ways.

Due to uncertainty regarding creditor protection of IRAs, many people are instead naming an irrevocable trust as the beneficiary of the IRA and their heirs as beneficiaries of the trust. Pitfalls of this method include:

• The required annual withdrawals have to be spread across the life expectancy of the oldest heir, losing the opportunity for a longer tax-free growth period.
• The IRS doesn’t allow trustees to tweak the language in such trusts, so you have to get it right the first time.

If the three concerns listed above don’t bother you much, you can use a lower-maintenance conduit trust instead, which has its advantages.

For more information on these trusts, see Kelly Greene, When Trusts Meet Retirement Accounts, W.S.J., July 24, 2010.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) and Jim Hillhouse (WealthCounsel) for bringing this to my attention.