A Trust To Hold your IRA or 401k For Your Partner

Qualified plan are one of the largest, if not the largest, asset many people own.  Qualified plans include a variety of programs designed to help you plan for you retirement; 401k, IRA, SEP, TIAA-CREF, 403b and Roth are all examples. 

Thanks to DOMA's demise, if you are married to your partner you can leave your qualified plan to your same-sex spouse without forcing recognition of income or estate taxes.  If you are not married, though, your Partner's options are limited to liquidating the plan and paying any deferred income taxes or electing to "stretch" the plan over your partner's projected life span, which defers the income tax recognition.  If your Partner elects to stretch, he or she must begin taking portions out beginning the year following your death and pay income tax on what is removed. 

Each choice results in your Partner owning the qualified plan.  As owner, the surviving Partner selects to whom the remaining money goes at his or her death after paying further inheritance and estate taxes.  Further, during your Partner's lifetime the qualified plan is exposed to creditors.

For all or some of these reasons, one Partner may wish to leave a large qualified plan to help care for a Partner, but may also wish to retain the right to name who receives any money remaining at the surviving Partner’s death, provide protection from the Partner's creditors and to avoid inheritance and estate taxes at the surviving Partner's death.  

A Trust is a great solution for these cases.  At our firm, for simplicity we call these trusts, "IRA Trusts", even if they hold other qualified plans such as 401k or TIAA-CREF accounts.   Since 2006 congress has mandated that every qualified plan must allow you the use of an IRA Trust.  The IRA owner names the IRA Trust as beneficiary, but during his lifetime he continues to own the IRA as he always has.  Nothing happens until the IRA owners dies.   

For example, Joe in Philadelphia formed an IRA Trust for his Partner, Bob and at Bob's death the trust says any remaining money passes to Joe's niece (lets call it the "Bob IRA Trust").  Joe then names the Bob IRA Trust as beneficiary of his IRA.  During his lifetime Joe owns and controls the IRA as he always had.  At Joe’s death, because he named the Bob IRA Trust as beneficiary, the IRA pours into the Bob IRA Trust.  The Trustee, who could be Bob, then elects to “stretch” the IRA over Bob’s lifespan.  This defers income tax recognition so the IRA funds can be invested for Bob's retirement.  The Bob IRA Trust owns the IRA so the IRA funds are sheltered from Bob's creditors.  Later, at Bob's death, the remaining IRA funds pass to Joe's niece free of Joe's creditors' claims and without paying inheritance or estate taxes. 

 

These trusts have many uses.  You can find more information at my website (klenklaw.com) or feel free to contact me with any questions you may have.