Legal-Ease: Trusts and retirement accounts

Essentially, a trust is a set of rules. Trusts serve a variety of purposes, but the primary purposes of trusts include avoiding probate, managing complex distributions of assets after death (especially in the context of stepfamilies), and protecting assets from eligibility. to Medicaid (usually a part of nursing home or long term care planning).

Traditional / Simple IRA, Roth IRA, and other tax incentive based retirement plans are retirement tools designed to provide tax benefits / incentives to allow people to save money for the future. retirement. Traditional IRAs hold “before income tax” money that can earn interest over time. The tax is only paid when the money is withdrawn from the account / plan.

Roth IRAs are funded with money for which income taxes have already been paid. This money can be withdrawn during retirement without being taxed at the time of withdrawal.

Since trusts and retirement accounts have different purposes, people with a trust sometimes want to put their retirement account in a trust.

The law clearly states that a retirement account cannot be placed in a trust (subject to the rules of a trust) as long as the owner of the pension plan is alive. The public policy of this law is that the government wants people to use and live off their investments in the pension plan when they retire. The incentives and tax benefits of pension plans are not intended to serve as primary methods of passing wealth on to future generations. Of course, some people die before those people’s retirement accounts are paid. However, the idea is that this circumstance should be the exception and not the rule.

Because the government wants people to use their pension money in retirement, the government is not allowing additional rules (including trust rules) to be imposed on these tax-advantaged pension plans.

Nonetheless, beneficiaries of retirement plans can be established to hold retirement funds after the death of the original owner. In these circumstances, if the person who has the IRA or SEP dies with money in one of these accounts, the person’s beneficiaries (or heirs if no beneficiary is named) may receive the funds. remaining at the time of death.

Since pension plans can name beneficiaries, pension plans can be put in place to avoid probate. Thus, a trust is not necessary to help pension plans avoid probate.

Notably, although pension plans cannot be “in” trusts as long as the owner of the pension plan is alive, the owner of the pension plan can designate a trust as the beneficiary of the pension plan. This may respond to a second value of trusts, which is the ability of money to be organized for more complex post-death distribution plans.

Unfortunately, the assets to be protected from long term care expenses (retirement home) via a trust must be in trust for these assets to be protected. Since retirement accounts cannot be placed in a trust during the lifetime of the owner of the pension plan, the only way to use a trust to provide protection for long term care (nursing home) is to liquidate retirement funds, eliminating tax benefits.

Lee R. Schroeder is a Licensed Ohio Lawyer with Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning, and agriculture in Northwestern Ohio. He can be contacted at [email protected] or to 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed lawyer of your choice based on the specific facts and circumstances you are facing.