The SECURE Act 2.0 has brought significant changes to how retirement accounts are inherited, particularly when it comes to the payout period for beneficiaries. One of the most notable provisions under Section 1.104(a)(9)-5(f)(2)(ii)(C) allows for an extended deferral period beyond the standard 10-year payout rule, especially when there are eligible designated beneficiaries, such as minors. For families with multiple beneficiaries, including at least one child under the age of 21, a standalone retirement plan trust can offer unique advantages in maximizing tax deferral and protecting retirement plan assets. Here are some of the key benefits of creating such a trust:
1. Extended Tax Deferral for Minor Beneficiaries
Under the SECURE Act 2.0, most beneficiaries of inherited retirement accounts must fully withdraw the funds within 10 years, known as the “10-year rule.” However, minor children who qualify as Eligible Designated Beneficiaries (EDBs) are granted an exception. These beneficiaries are allowed to take small Required Minimum Distributions (RMDs) based on their life expectancy until they reach the age of 21, after which time the 10-year payout period begins. This extended deferral period can significantly reduce the tax burden on younger beneficiaries by spreading taxable distributions over a longer period. And in cases where there are multiple child beneficiaries, the measuring life for the RMD from the account to the trust is the oldest child’s age, but the length of deferral is determined by the youngest beneficiary under the age of 21.
By setting up a standalone retirement plan trust, parents can ensure that these distributions are managed and protected for their minor children, giving them a longer timeline for tax-deferred growth of the retirement account(s).
2. Asset Protection for Multiple Beneficiaries
A standalone retirement plan trust can also serve as a powerful asset protection tool. When retirement accounts are distributed outright to beneficiaries, the funds become vulnerable to the beneficiary’s creditors, lawsuits, divorce settlements, or mismanagement. A well-structured retirement plan trust can protect these assets by keeping the distributions under the control of a designated trustee, ensuring that the funds are used according to the grantor’s wishes and are safeguarded from external threats.
This is particularly important when there are multiple beneficiaries, such as children with different needs, financial situations, or ages. The trust can be customized to allocate distributions in a way that is most beneficial to each child.
3. Preservation of Wealth and Control Over Distributions
For families with multiple beneficiaries, especially those with a minor child under the age of 21, creating a standalone retirement plan trust allows the grantor to maintain control over how and when the inherited retirement funds are distributed. The grantor can specify that funds be used for certain purposes, such as education, healthcare, or other needs, without the risk of premature depletion of the account.
The trustee can also ensure that the minor beneficiary takes only the RMDs required under the law, while allowing the remaining assets in the retirement account to grow tax-deferred. Once the youngest child reaches the age of 21, the 10-year payout period begins, but until then, the trust can act as a protective shield, preserving the wealth in these accounts for future needs.
4. Flexibility and Coordination with Other Beneficiaries
In the case of multiple beneficiaries, a retirement plan trust can also provide flexibility in managing the inheritance. For example, if one child is a minor and others are adults, the trustee can coordinate the timing and amount of distributions from the trust to best serve the needs of each beneficiary.
By consolidating the management of the retirement account through a trust, the grantor ensures that the funds are distributed in a way that aligns with their estate planning goals, rather than following the default distribution rules imposed by the SECURE Act.
A standalone retirement plan trust is a valuable estate planning tool for families looking to maximize the tax deferral benefits of inherited retirement accounts, particularly when one of the beneficiaries is a minor child. Under SECURE Act 2.0, creating such a trust allows families to protect assets from creditors, extend the payout period, and maintain control over how funds are distributed to multiple beneficiaries. By working with an estate planning attorney experienced in planning around retirement accounts, you can structure the trust to ensure that your family’s financial future is secure, while minimizing tax consequences and providing flexibility for your loved ones.
If you, a friend, or family member need help establishing or updating an estate plan or a Retirement Protector Trust, please reach out to our Intake Department at 760-448-2220 or at https://www.geigerlawoffice.com/contact.cfm. We have offices in San Diego County (Carlsbad) and Orange County (Laguna Niguel), but we assist can families throughout California as well.
