Retirement Account Trusts
Generally, if you are married, it's often best to name your spouse as a designated beneficiary of your retirement account. This would allow your spouse to "roll-over" your retirement accounts into their own and also avoid probate.
Issues can arise by naming a revocable living trust as the beneficiary of a retirement account. Tax Code and Treasury Regulations require the trustee of a standard revocable trust to withdraw the entire balance of a retirement account within five (5) years of the owner's death. This would have significant income tax implications.
By naming individual beneficiaries of retirement accounts, the beneficiary can withdraw money from the account over their lifetime according to life expectancy. By spreading out distributions, they can minimize income tax. Dangers arise, however, when a person withdraws a lump sum, either intentionally or inadvertently, resulting in a huge tax bill. The beneficiary could also lose the money to lawsuits, creditors, divorce, addiction, or a "spend down" for government benefits relating to disability. A surviving spouse should carefully assess the financial know-how and credit risks of next of kin.
Retirement account trusts or IRA Trusts allow one to have it both ways. IRA Trusts ensure that clients' beneficiaries stretch out their required minimum IRA distributions, thereby providing maximum benefit and potentially allowing for compounding many years free of income-tax. In addition, an IRA trust allows the option to give a "Trust Protector" the right to elect between minimum required distributions ("MRD") on an annual basis or to have a full discretionary "accumulation trust," where the trustee can hold the MRD inside the trust if the beneficiary has asset protection concerns.
Election by the "Trust Protector" must be made by September 30th of the year following the death of the retirement account owner. The election could also result in a shorter stretch because the age of the oldest possible beneficiary must be used (the "Trust Protector" may be given power to limit such possible beneficiaries to minimize this issue, however). Having the option to elect between minimum required distributions from the IRA Trust and holding the minimum required distributions inside the trust provides flexibility to consider all factors at the time of death (e.g. creditor problems, disability), up to the election deadline.
If done properly, even a modest retirement account can accumulate millions of dollars when stretched out over the lives of next of kin.