Tax-deferred retirement savings is many people’s biggest asset. But because taxes have not been collected on those funds yet, there are complicated rules around when those funds have to be distributed. The government ensures that spouses receive special treatment when inheriting a retirement account (for instance, spouses have the ability to roll over the account into a personal retirement account, or can stretch the distributions over their lifetime.) Despite this protection, many clients aren’t aware that the retirement account they leave for their spouse can still be seized in a divorce, lawsuit, or bankruptcy proceeding.

What Options Are Available to Surviving Spouses?

The spouse who inherits an IRA, generally has three options:

1. Cash out the inherited IRA and pay the income tax.

Downsides: The cashed-out IRA will not have creditor protection and accelerates taxation. Once your spouse cashes out the account, he or she may use the money in any way. In addition, if your spouse dies before all the money has been spent, he or she can leave the money to anyone (even a mere acquaintance who was unknown to you).

2. Maintain the IRA as an inherited IRA.

Downsides: The inherited IRA will not have creditor protection. However, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a spouse can take the required minimum distributions from this account over his or her lifetime without being held to the ten-year rule, as most other beneficiaries are.

3. Roll over the inherited IRA and treat it as his or her own.

Downsides: The spousal rollover may offer some creditor protection but not in all cases. In addition, depending on whom your spouse leaves his or her retirement account to, there is now a larger sum of money to be distributed by the end of the tenth year after his or her death, accelerating additional income taxes for the next beneficiary.

If you are concerned that a stranger might swoop in and take your hard-earned money, there is a solution: a properly drafted standalone retirement trust (SRT).

What is an SRT?

An SRT is a special type of trust designed to be the beneficiary of your retirement accounts after you die. One of the biggest advantages is that a properly drafted Standalone Retirement Trusts can protect your retirement account funds from your beneficiary’s creditors. In fact, we can include trust provisions that specifically protect your spouse in situations such as

  • second marriages;
  • divorce;
  • lawsuits from car accidents, malpractice, or tenants;
  • business failure; and
  • bankruptcy.

Need More Information? 

For many clients, a properly drafted SRT is often the best option to protect your retirement accounts after death. Want to know more? Contact us today to schedule a conversation. We look forward to working with you.