What You Should Know About Lifetime Asset Protection Trusts
by Tom Bouman
by Tom Bouman
1. What is an IRA Protection Trust?
The IRA Protection Trust is a sophisticated estate planning technique intended to coordinate the administration and distribution of IRA assets after death. While generally reserved for persons with more than $100,000 in tax-advantaged retirement accounts, the IRA Protection Trust is fast becoming an integral component of comprehensive estate plans. The IRA Protection Trust is a legal document that formalizes the availability of the income tax-saving “stretch IRA” rules and permits extensive post-death contingency planning and asset protection planning.2. What are the benefits of an IRA Protection Trust?
Typically, an individual beneficiary of an IRA has the option to take a lump sum payment or take required minimum distributions (“RMDs”) each year, which are calculated using the beneficiary’s life expectancy. The latter is referred to as a “stretch IRA.” The stretch IRA is generally a better choice because it allows for continued income tax deferral inside the account.An IRA Protection Trust mandates the use of stretch IRA treatment by the beneficiaries. In other words, the strategy compels long term income tax deferral, rather than assuming the beneficiary will elect it.
There are other benefits:
- Owner can establish a post-death contingency plan for the IRA funds in the event of a beneficiary’s death, divorce, or extended incapacity.
- Owner can direct balance of IRA at surviving spouse’s death to owner’s children from a prior marriage, rather than spouse’s children or new spouse.
- Beneficiary receives a much larger inheritance by leveraging the income tax deferral over a longer period.
- Beneficiary receives an inheritance fund that is protected from frivolous lawsuits and ex-spouses.
- Beneficiary with special needs will not lose eligibility for government benefits.
3. Does the IRA owner lose control of the IRA?
No. The IRA Protection Trust will not change any aspects of the IRA owner’s retirement planning until after the owner’s death. The IRA owner retains total control over the IRA investments, distributions, and choice of beneficiaries. There are no restrictions.4. What type of IRA Protection Trust provides the most asset protection?
There are two types of IRA Protection Trusts: conduit and accumulation. While both include asset protection features, the accumulation trust is stronger. Here’s why:The conduit trust requires that the trustee forward the RMDs from the IRA to the beneficiary each year. The trust actually serves as a flow-through – conduit – when RMDs are paid out.
The accumulation trust permits the trustee to retain – accumulate – the RMDs inside a separate account owned by the trust instead of giving them outright to the beneficiary. The accumulated money is secure from creditors.
The trustee of a conduit trust does not have any discretion about whether a trust distribution is appropriate. In fact, the trustee must distribute at least the amount of the RMD each year. However, the trustee of an accumulation trust will use its discretion when choosing whether to distribute trust funds to the beneficiary.
5. Why not incorporate these provisions into a Living Trust?
Most living trusts fail to consider all of the complex rules regarding retirement accounts payable to trusts. They are focused on dealing with assets otherwise eligible for probate, like your real estate and bank accounts. For example, if the living trust directs IRA assets to an accumulation trust (meaning that the trustee has the power to accumulate distributions in the trust), then the RMDs must be calculated based on the life expectancy of the oldest beneficiary. Unfortunately, even potential beneficiaries count, so for example, even naming your parent as contingent beneficiary of your assets is enough to trigger use of the parent’s life expectancy instead of a younger, primary beneficiary’s life expectancy. Living trusts are rarely drafted with the necessary precision to avoid problems like this.6. Why not use a Trusteed IRA?
A few select IRA custodians offer a technique called the Trusteed IRA (aka individual retirement trust). This is similar to an IRA Protection Trust because it grants additional control over the choice each beneficiary makes regarding the distribution plan. However, the Trusteed IRA does not permit the accumulation feature and limits trustee discretion. Also, the minimum account size tends to be $500,000 or more.Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.
Thomas J. Bouman
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www.TomBoumanLaw.com
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