Content courtesy of Geiger Law at 760-448-2220 or www.geigerlawoffice.com/contact.cfm.
A Retirement Protector Trust™ (also commonly known as a Retirement Plan Trust) is a specialized stand-alone revocable trust designed to receive and protect retirement account distributions such as IRAs, 401(k)s, and other qualified accounts upon your death. It insulates these assets from a beneficiary’s creditors, bankruptcy, lawsuits, or a divorcing spouse. This is accomplished by naming the Retirement Protector Trust as the primary or contingent beneficiary of your retirement account(s).
Why It Matters Under SECURE Act 2.0
The SECURE Act of 2019 and its 2022 update (SECURE Act 2.0) made significant changes to how retirement accounts are handled after death. Most non-spouse beneficiaries must now fully withdraw inherited IRA or 401(k) funds within 10 years of the account holder’s death (unless they are eligible designated beneficiaries such as minors, chronically ill or disabled individuals, or those not more than 10 years younger than the decedent).
This 10-year rule eliminated the ability for most beneficiaries to "stretch" distributions over their lifetime. As a result, planning for tax-efficient and creditor-protected withdrawals has become more important than ever.
Benefits of a Retirement Protector Trust
Creditor Protection: Assets held in the trust are better protected from lawsuits, bankruptcies, and divorce proceedings of the trust beneficiary.
Tax Efficiency: With proper drafting, income distributed to the trust can be taxed at the beneficiary’s individual tax rate instead of the higher trust income tax rate.
Control: You determine how and when distributions are made to your beneficiaries through the Trustee of the trust.
Customization: Each beneficiary can have their own trust share with tailored provisions based on age and financial responsibility.
Ownership Clarification
The trust is never the owner of your retirement account. Instead, the trust acts as the designated beneficiary. The trust receives distributions per the rules applicable to inherited retirement accounts under I.R.C 409 (a)(9) and distributes (or retains) the proceeds according to the trust terms.
Should You Make the Trust Beneficiary-Controlled at a Stated Age?
Some individuals choose to allow beneficiaries to manage their trust share once they reach a certain age (often between 25-35). This gives beneficiaries more autonomy but could increase potential exposure to lawsuits, divorce, and creditors. A prudent solution may involve including a Trust Protector who can remove and replace the beneficiary acting as a Trustee or appoint an Independent Trustee who can take over administration if risks arise if the beneficiary Trustee were to resign as Trustee.
Multiple Beneficiaries and Tailored Provisions
Retirement Protector Trusts also allow for multiple beneficiaries, each with customizable provisions. This is critical if:
A beneficiary is a minor
A beneficiary has substance abuse, is young and inexperienced or has spending issues
A beneficiary has other creditor risks or is married.
However, note that a beneficiary who is a “special needs” (aka: chronically ill or disabled) person should have a single beneficiary Retirement Protector Trust due to the complexity of the law
Establishing the Trust
If you're married, it is best practice to establish a separate Retirement Protector Trust for each spouse. Upon the death of the second spouse, the Retirement Protector Trust can become the beneficiary of your combined retirement account(s). If your beneficiary form names the Retirement Protector Trust and specifies individual shares for each child or grandchild, the Trustee can ensure distributions are managed separately for each beneficiary.
Accumulation Style Trust Example
If your IRA has $1 million and you name two adult children as equal beneficiaries of an accumulation-style Retirement Protector Trust, each child’s share will be allocated $500,000. Under SECURE Act 2.0, those funds must be fully distributed from the IRA to the trust by December 31 of the 10th year following your death. However, the Trustee has discretion to space the distributions over time to optimize tax impact and preserve assets (if the inheritance occurs after your required beginning date and you were already taking RMDs, the beneficiary must continue to take RMDs based on your life expectancy during the 10 year distribution period, with the entire balance required to be distributed by the end of the 10 year period after death).
Retirement Protector Trust for Minor Beneficiaries
If the beneficiary is a minor, the Retirement Protector Trust can be drafted as a Conduit Trust. In this case, the required minimum distribution (RMD) from the inherited retirement account flows through the trust and is paid out to the child’s legal guardian annually until the child reaches the age of majority (age 21 under the Secure Act), after which time the 10-year rule begins for the account to be fully withdrawn. If you have multiple children and at least one of your children is under the age of 21, it may be worthwhile creating a common trust until the youngest child reaches age 21 to maximize the stretch out rules for eligible designated beneficiaries under the Secure Act. This could allow the retirement assets to remain in the tax deferred environment of your qualified retirement account for a longer period of time than the traditional 10 year rule (i.e., until the youngest child reaches age 31).
Who Should Consider a Retirement Protector Trust?
Individuals with combined retirement accounts exceeding $300,000
Parents who want to protect their children’s inheritance from future ex-spouses, lawsuits, creditors, or financial mismanagement
Anyone with beneficiaries who are minors, financially inexperienced, have special needs, or may desire creditor protection (especially when the amount of retirement funds is significant)
Real Life Example: John & Sandy
John, 57, and Sandy, 56, have two young adult children, Max (22) and Alexis (24). John’s IRA has a balance of $1,000,000. Concerned about protecting their children’s inheritance, John and Sandy each establish a Retirement Protector Trust. During their lifetimes, they each serve as Trustees of their respective trusts, which are funded with nominal amounts (i.e, $10).
John lists Sandy as the primary beneficiary of his IRA and his Retirement Protector Trust as the contingent beneficiary. After both John and Sandy pass, their named Successor Trustee manages the trust for Max and Alexis until they each turn 35. At that point, each child may serve as their own Trustee (beneficiary-controlled) and manage their sub-trust and distributions there from.
All retirement assets must be withdrawn from the inherited IRAs into the trust by the end of year 10. The children may take distributions gradually over that time if the last to pass of John and Sandy were 73 or younger when they died. If the last to die was over 73, RMD distributions over the 10 year period are based on the Grantor's RMD schedule. If the assets remain in the trust, special provisions can be drafted to allow trust income to be taxed at the child’s personal rate.
Maximizing Protection and Flexibility
To enhance protection, John and Sandy name an Independent Trustee to serve after their deaths until each child reach age 35 and they include a Trust Protector with powers to:
Appoint a new Trustee during a vacancy or to remove and replace the existing Trustee
Modify the tax law provisions of the trust in the event of a law change
Maintain flexibility for changing circumstances through the ability to amend the trust in certain other limited circumstances
Move the trust to a new jurisdiction for more advantageous administrative purposes
Interpret the terms of the trust if there is a discrepancy or disagreement among the Trustee and beneficiaries as to the meaning of a provision in the trust without court interference
With the SECURE Act 2.0 accelerating the timeline for retirement distributions for those who inherit them, now is the time to consider whether a Retirement Protector Trust should be part of your estate plan. It provides valuable control, protection, and tax advantages for your children or other loved ones.