Although there is no hard and fast rule on how often you should update your trust, conducting an annual review of the trust and asset schedule is recommended. Circumstances will inevitably change. There will always be changes in the law – especially the tax laws. There are also going to be changes in your family situation or the make-up of your assets over time.
The Federal Estate Tax Exemption has changed more than a half dozen times over the last fifteen years. Currently it is $11,180,000 per person. The marital clause in your trust or your parents’ trust may have been the most appropriate clause at the time it was drafted ten or fifteen years ago. However, today it may cause a lot of unnecessary capital gains taxes when the assets pass to your children (or to you when both of your parents pass in the case of your parents’ trust).
Further, the needs of your beneficiaries will more than likely change over time as well. For example, we often review trusts that have language that says when a child inherits, they can access 25% at age 21, 50% at age 25 and the balance at age 30. This was a popular way to drafting in the 1990s and into the 2000s. However, the state of the art in estate planning now -that more progressive attorneys use- is to protect children from divorcing spouses, creditors, predators and bankruptcy claims with cascading trust provisions. In the trusts where the balance is available in an outright distribution at age 30, there is no protection for a child should they go through a bad divorce, get sued, go through a bankruptcy or have some other serious creditor issue.
Asset alignment can also be a situation where the wheels can come off the proverbial estate planning bus. A change in the make up of the assets is something that happens almost universally to all our clients every couple of years. The issue that this brings in the estate planning context is that the assets are often not properly funded to the trust or aligned with the estate plan. This is why it makes sense to be meeting with your estate attorney on a regular basis in order to ensure all of your assets are properly funded or coordinated in your estate plan. The asset schedule at the back of your trust also requires a short formal amendment when those assets change.
Being proactive is worth its weight in gold and will ensure the plan works as planned down the road. Make sure to make course corrections as you go to protect yourself, your spouse and your children or other family members. No one wants court interference, extra taxes or a train wreck for their family to deal with in the future.
If you suspect you may need an update to your estate plan or funding of your assets to your trust, give me a call and I can put you in contact with low-cost legal solutions.
Another little-known fact to most is that an inherited IRA can be preyed upon by an inheriting child’s creditors, predators and divorcing spouse. There is a way however to prevent that from ever happening. The solution is to have a barrier between the retirement account and the beneficiary. This barrier is called a Standalone Retirement Trust.
The Standalone Retirement Trust strategy is right for those who want to give their children or other beneficiaries the gift of a stretch-out out of their IRA or other retirement accounts while protecting the accounts from a child’s creditor, predators or divorcing spouse. You may not even realize that the stretch-out of your IRA could provide your children ten (10) times or more the current balance in your IRA when inherited if the account were properly stretched-out over your children’s lifetime(s).
Remember that the tax laws and IRS rules may change over time, potentially limiting the effectiveness of the Stretch IRA strategy. However, at the time of this writing, in California, the top state and federal income tax rates combined amount to a tax rate of over 50%. Therefore, if your beneficiary has direct access through your beneficiary designation form to cash out your IRAs or other retirement accounts when they inherit them, that could place your beneficiary in the highest income tax bracket for that year (depending upon the size of your account(s)). This in turn could result in more than half of your retirement accounts being lost to the IRS in income taxes when you pass.
Keeping these factors in mind, it’s important to stretch-out your IRA distributions for your beneficiaries as long as possible (the stretch). It is wise to consider protecting a child or other beneficiary through the use of a special type of trust called a Standalone Retirement Trust (sometimes also referred to as a “Retirement Plan Trust” or “IRA Trust”). The trust helps to ensure the stretch-out of your IRAs or other qualified retirement accounts for your children and also to protect them from divorcing spouses, bankruptcy, lawsuits, and other predatory creditors taking the accounts from them.
Typically, when doing this type of advanced estate planning, a married couple will establish two Standalone Retirement Trust, one for each spouse. If both spouses were to die simultaneously, each spouse’s retirement accounts would funnel RMDs annually to their Standalone Retirement Trust for the benefit of their children or other beneficiaries calculated based on the ages of each beneficiary at that time.
The Trustee of the Standalone Retirement Trust must elect to stretch the IRA or other retirement account for each beneficiary and begin taking RMDs for each trust beneficiary by December 31st in the year following your death. Alternatively, if your spouse were the primary beneficiary of the IRA and they are still alive upon your death, it would not be until your spouse’s death that the Trustee of your Standalone Retirement Trust would stretch the IRA for the benefit of your children or other trust beneficiaries. This is because most married couples elect to list their spouse as the primary beneficiary of the account and their Retirement Protector Trust as the contingent beneficiary.
It’s also important to note that when your spouse completes a spousal rollover after your passing, they should update the IRA beneficiary designation form to list their respective Standalone Retirement Trust as the new primary beneficiary (and make sure they have an enhanced durable Power of Attorney as part of their estate plan to ensure that a Power of Attorney agent is able to do this on their behalf if they lacked capacity).
Upon the death of the surviving spouse, the trust beneficiaries generally take distributions from the IRA based on the life expectancy of the oldest beneficiary if only the trust itself is listed on the beneficiary form, but there is a far better alternative to this result. If the Trustee of the Standalone Retirement Trust splits the IRA or other retirement account into separate accounts for each beneficiary, each beneficiary’s share can be individually stretched based on their own life expectancy. The benefit in that is that a younger beneficiary will be required to take a smaller distribution from the IRA annually than an older beneficiary, thus allowing that beneficiary’s share of the IRA to remain in a tax deferred environment longer – accumulating more money over time. This beneficiary specific stretch through the Standalone Retirement Trust is usually achieved by using a custom drafted addendum attached to the retirement plan custodian’s beneficiary designation form.
In the case where your primary beneficiary is not a spouse, you would name your Standalone Retirement Trust as the primary beneficiary (with an addendum if the trust has more than one beneficiary). While you are alive, you as the IRA owner, need to begin taking RMD payments at age 70 1/2 using the IRS Uniform Distribution Table to calculate the distribution that must come out of the account and be taxed as income to you (note, this is not the case for ROTH IRAs).
Upon your death, your Standalone Retirement Trust beneficiaries are required to take required minimum distributions by December 31st in the year after your death. If the Trustee of your Standalone Retirement Trust stretches your IRA, 401K or other qualified retirement account, your trust beneficiaries would receive an annual distribution from your accounts. Again, it is important to note that each beneficiary’s share can be stretched based on their own life expectancy if the form calls out the separate shares of the trust on an addendum to the beneficiary designation form.