I was recently helping move livestock between pastures and realized that the vast majority of the animals simply followed along with the rest of the herd. A few straggled behind, or attempted to break from the herd, but most were just along for the journey without really paying attention to where they were going. It then came to mind that there is a scary parallel between humans and livestock.
Human nature tends to encourage us to follow along with the rest of the herd. Sometimes we don’t even recognize that we are just along for the journey, and not paying attention to where we are going.
This tendency has shown itself as I’ve dealt with clients related to the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019), and the reaction of the financial community to this new legislation.
As the “experts” have reviewed the language of the legislation and issued their opinions, a theme has risen to the forefront.
There is now a standing recommendation from most financial companies that their advisers should inform clients that it is a bad idea to name a trust as a beneficiary of their retirement accounts.
Why this recommendation?
Let’s take a look at this recommendation.
First, why would these companies make this recommendation? The reasoning that has motivated the industry to recommend this course of action is simple. The new legislation reduces the ability for most non-spouse beneficiaries to continue income tax deferral on retirement accounts to a 10-year period. The financial industry is concerned that the increased required distributions will be taxed at a higher rate if they are payable to a trust, rather than being payable to an individual. Financial institutions are very risk-averse. They do not want their clients facing additional taxation and then coming back against them because they didn’t disclose the risk. Because most advisers don’t understand the issue, they simply issue a general recommendation not to use trusts as a beneficiary. Sadly, many people take the advice without further consideration.
Do things make sense?
Second, is it a good recommendation? While it may be an appropriate recommendation in some circumstances, for those individuals who have a well-designed estate plan, it could be very detrimental. Using trusts as a beneficiary can offer benefits that outweigh the concerns that have motivated the “no trust” recommendation.
An inherited retirement plan, other than a spousal rollover, loses all of the creditor and other protections afforded to retirement plans. This leaves these important tax-advantaged assets exposed to the life risks of your beneficiaries: risks like catastrophic creditors, future divorce and catastrophic medical bills. And the belief that assets held in a protective trust must be taxed at a higher rate is simply mistaken. There are many effective planning techniques that can allow income on assets held in a protective trust to be taxed at the beneficiary’s individual tax rate. Unfortunately, many advisers, CPAs and attorneys are unfamiliar with these techniques. As a result, the industry follows the herd and makes a general recommendation to clients.
How do we break from the herd and get the advice we need to get the most benefit out of our estate plans and retirement accounts, and the most benefit for our families? Don’t accept the general advice meant for the herd as the advice you need for your specific situation!
You should meet with an experienced estate planning professional to get the counsel you need to determine what the best course of action to accomplish the goals and objectives you have for your family. I am always amazed when people accept advice critically important to the success of their estate plan from their financial adviser. Please understand, I don’t have anything against financial advisers; they are a critical and important part of a successful financial future, but they are not estate planning attorneys.
Break from the herd and get the advice best for you. Naming a trust as a beneficiary of your retirement plan should depend entirely on your goals and objectives, and not be based on general advice designed to avoid problems that can be overcome with effective planning.
Choose carefully where you get your advice, and spend the money to get the quality advice you need. Don’t shortchange yourself and your family by thinking that following the herd is the best journey to take. Following the herd eventually leads to the slaughterhouse.
Dolan, an attorney, is the principal of Dolan & Associates P.C. in Brighton and Westminster, Colo. Learn more at estateplansthatwork.com.