Estate Planning Made Easy: How Does A Stand-Alone Retirement Trust Work? And How Effective Is It?

Estate Planning Made Easy: How Does A Stand-Alone Retirement Trust Work? And How Effective Is It?

A stand-alone retirement trust (SART) is a powerful tool for estate planning. It’s a separate trust that allows you to save and invest for retirement in a tax-advantaged way while still protecting the assets from probate. 

If you’ve never heard of SARTs or are wondering how they work, this guide will help you understand what they are and how they can benefit your estate plans.

What Is a Stand-Alone Retirement Trust?

A Stand-Alone Retirement Trust is created to hold and manage retirement assets. The SART is generally used for one or more beneficiaries to provide income during their lifetime and/or to provide a legacy after death.

SART was also a part of the CARES Act for COVID-19 relief. The CARES Act deducted the 10% early distribution tax applied to SART. A SART can be created as an irrevocable or revocable living trust, with either an individual or corporate trustee acting on behalf of the grantor.

Why Do You Need a Stand-Alone Retirement Trust?

You should consider a stand-alone retirement trust if:

  • You need to protect your retirement assets from creditors and lawsuits.
  • You want to control how your assets are distributed after you die.
  • You want to avoid probate court proceedings and the costs associated with them. According to a Nasdaq article, the probate cost in 2021 ranged between 3-8% of the estate valuation. A trust can help you avoid this cost by allowing assets in the trust to pass directly from the grantor’s estate into the beneficiary’s hands.
  • You want to ensure that all of your beneficiaries receive their share of the inheritance according to their needs, including children from previous marriages or pets.

How Does a Stand-Alone Retirement Trust Work?

A stand-alone retirement trust is a trust that is created and funded by the grantor. The assets in this type of trust are not part of their estate, meaning they will not be subject to probate when they die. In addition, it isn’t considered a beneficiary of the grantor’s estate. Therefore, it won’t receive any portion of its inheritance upon death.

SART is essentially helpful if you are leaving a lot of assets for your family. Also, you must know about federal taxes on such assets. It mostly applies to estates worth $12.92 million in 2023.

This type of trust aims to hold assets for someone else’s benefit while still allowing them access to those funds during retirement without having them pay income tax on distributions taken out before age 59 1/2.

You can find more information about a stand-alone retirement trust on a law firm’s website like ours with free educational resources. Many firms create resources like blog posts and educational videos to educate potential customers. Thienel Law also offers such educational resources. It has a blog, videos, and legal guides section with plenty of information about estate planning and probate.

Like many other firms, even Thienel Law has also mentioned client testimonials on its website. These testimonials are from previous clients and their experience with the company. You can also read the reviews to determine how reliable the educational resources on the website can be.

Advantages of Using a Stand-Alone Retirement Trust

A stand-alone retirement trust is a private trust that provides for the lifetime income of a beneficiary. Because it is a private, irrevocable trust, it is unnecessary to go through probate when the grantor dies. This can benefit those who want to avoid probate court or are concerned about compromised financial privacy.

Protecting Retirement Assets

Protecting retirement assets is a benefit of a stand-alone retirement trust. A stand-alone retirement trust is separate from the grantor, who can be the trust’s beneficiary. The grantor may name himself or herself as a beneficiary but does not need to.

Suppose the grantor does not name himself or herself as beneficiary. In that case, there will be no distribution of assets until after death, when it passes on automatically to heirs according to their respective interests in your estate plan.

A stand-alone retirement trust is not subject to claims against your estate by creditors. It’s protected from bankruptcy proceedings and court judgments against you because it has its own separate identity under state law.

This means if something happens while you’re alive or after death concerning debts or lawsuits involving real property owned by yourself or family members who have rights under this arrangement. Those assets cannot be taken away from their rightful owner.

Tax Efficiency

A stand-alone retirement trust is a trust that is created for the sole purpose of holding assets for the benefit of a beneficiary. The beneficiary can be a person or charity, but not both. The trust can be funded with cash or other assets such as real estate or investments.

Although you may have heard some disadvantages to using an irrevocable trust in your estate plan, it’s important to remember that there are also many benefits associated with this type of planning tool.

One major advantage involves tax efficiency; Uncle Sam considers IRAs and 401(k)s “tax-favored” accounts, so they don’t need any additional protection when placed into an irrevocable trust at death. This means less hassle for beneficiaries who want their inheritance now rather than later.

Flexibility

One of the most attractive benefits of a stand-alone retirement trust is its flexibility. Trustees can distribute to beneficiaries at any time and may distribute any amount they choose.

If you want your beneficiaries to receive smaller payments more frequently than larger ones, a stand-alone retirement trust allows this flexibility. For example, suppose your beneficiary is planning on making large purchases shortly. In that case, they may prefer having access to some money sooner rather than later so they can use their inheritance as soon as possible without waiting until the end of their lives before using it all up.

Estate Planning Control

The most common reason for establishing a stand-alone retirement trust is to control the assets in your trust. You can control how the assets are invested and distributed and who receives them at their death. This is important because:

  • Your heirs will not be required to take distributions from the IRA during their lifetimes if they do not want them, which preserves tax-deferred growth until after death, when it no longer matters.
  • You can choose whether or not beneficiaries receive all of the money at once or over time. This may be beneficial if multiple people need financial assistance at different times, such as children with disabilities who require lifelong care and support services that might not be covered by public benefits programs like Medicaid or Medicare.

These are popular packages by the government. According to Statista, over 84 million Americans were enrolled in Medicaid as of 2021.

Conclusion

A stand-alone retirement trust is a perfect tool for you to use in your estate and tax planning. It’s flexible, easy to set up and use, and gives you control over how your assets are distributed after death.

By adding this type of trust into your overall plan for financial security, you can be sure that you and those closest to you will have peace of mind knowing that everything will be taken care of when needed most.

Source: Thienel Law

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