Does A Retirement Plan Pass Through Probate? Part Two

What Types Of Trusts Are Useful In Protecting Retirement Plans?

There are a number of schools of thought here. In our practice, we feel a revocable living trust is not a good vehicle to handle retirement plans. Often these are not drafted with the appropriate language to comply with the IRS service regulations to be what’s called a “see-through trust”. A Retirement Plan Trust is specifically drafted to comply with the service regulations and meet all the criteria so that if this trust is designated as the beneficiary, you will be able to preserve the tax deferral for those named beneficiaries to get the stretch advantages.

A key issue is how much to you trust your beneficiary’s to make the financially sound decision of a stretch IRA and how much can you rely on them to make the required timely elections and transfers to secure the continued tax deferral? If you leave it up to them, just as a named beneficiary, they can choose to cash it out if they would like to, and often that is a very bad decision. Often when you are looking at a large amount of money, beneficiaries often make the wrong decision. With a retirement account trust, you can control the choice, requiring that the beneficiary stretch out that IRA over their lifetime. There are further advantages to the inheritance trust, and it primarily comes from a recent decision of the Supreme Court.

In a landmark, unanimous 9-0 decision handed down on June 12, 2014, the United States Supreme Court held that inherited IRAs are not “retirement funds” within the meaning of federal bankruptcy law. This means they are available to satisfy creditors’ claims. This case an adult child, who had inherited her IRA from her mom and subsequently, due to a change in the business environment had to declare personal bankruptcy due to her failing business. As the primary saver our IRAs, our retirement savings, are protected from recovery in a bankruptcy. By relying on the beneficiary designation, there is no bankruptcy protection for that inherited money that the child may receive. If it comes in the structure of a retirement plan trust, not only can we influence the choice of the child to make the right financial decision, but we can draft it in language such that we can re-invoke those protective qualities in the event of a bankruptcy by using a Retirement Plan Trust.

We can also draft protective qualities in the event of a divorce where we can make sure that any inherited IRA, or any retirement funds, stay with your child and not the future ex-spouse.

For more information on Retirement Plans & Probate, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling the estate planning lawyers of Krause Donovan Estate Law Partners, LLC practice law in the areas of Probate, Wills, Estate Planning, and Trusts. We assist clients in and around Madison, Wisconsin with all matters related to estate planning, trusts, and probate matters. Our dedicated attorneys will even make house calls if you are unable to come to our office.

Contact our office by calling (608) 268-5751 to schedule a free consultation or use our online contact form.