When simple is not always better

It is a sign of the times: simplify, simplify. It is why the life-changing magic of tidying up book is a best seller. But occasionally the benefits of something “not simple” are worth considering.  Trusts are not simple but the benefits may outweigh the added complexity. One often overlooked area where a trust can be of great benefit, in the right circumstances, is its use with retirement benefits such as IRAs and 401Ks.  So what are these right circumstances?

Incapacity. If your retirement account beneficiaries are minors or have physical or mental limitations, you most certainly want to consider having these funds go into a trust. Not doing so can result in the loss of governmental benefits and expensive court proceedings to oversee the distribution of your funds or, at the very least, the appointment of a custodian of the funds who may not be someone of your choosing.

Creditor Protection.  Unless a state has laws providing otherwise (and few do), there is nothing to prevent a creditor of your beneficiary from seizing those funds to satisfy a debt of the beneficiary. Fortunately, Texas has a law that prevents that but not all beneficiaries have the good judgment to live in Texas.

Spendthrift Protection.  Sometimes, those closest to us need a little help with their spending patterns to ensure a wise use of the funds. Withdrawing large amounts of inherited retirement funds all at one time (a common practice) cannot only impact the financial security your gift was meant to provide but could also result in a large tax bill. Unless your funds are in a Roth IRA, your beneficiary has to pay regular income taxes on every dollar withdrawn and a large withdrawal could cause the beneficiary to pay not only more taxes but pay at a higher tax rate.

Unfortunately, federal legislation passed in December 2019 has taken away the ability to spread withdrawals from inherited retirement funds over a beneficiary’s lifetime for most beneficiaries. That change in the retirement tax laws certainly is a factor that needs to be considered in deciding if a trust is appropriate.

If any of the circumstances described above apply, it does not automatically mean a trust should be named as the beneficiary of your retirement accounts. What it means is that you should have further discussion with your estate planning professional about the benefits of trusts in the context of your overall estate plan. Such things as the value of your retirement account, your marital status, the age and circumstances of non-spousal beneficiaries, and how important keeping things simple are to you need to be considered.

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My wife and I asked Joe Gagen to prepare our wills, powers of attorney, and all of the other end-of-life documents that would be needed for responsible estate planning. Joe was very thorough and detailed in his work, and in providing good, clear answers to all of our questions.

He also provided very good information about completing the beneficiary forms for our IRAs. These forms are not always straight forward, and he waded through the details to give us valuable information. All of this was covered under his will/document preparation charges.

We plan to return to Joe in the future if there is a need to update any of these documents, or if we have further questions. We would give him our highest recommendation.

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