November 27, 2017
Does My Trust and IRA Protect My Kids From Divorce in Michigan?
There is a common misconception that if you have a trust, automatically it protects the kids from divorces, lawsuits and creditor problems. This becomes more of an issue in the more complicated when there are IRAs or retirement accounts involved. For many clients, their IRA or retirement account is one of their largest assets and too often there is misinformation and wrong information how to handle these types of accounts. Long story short, if the trust is set up correctly, then the trust should be named as a contingent beneficiary typically, after a spouse. However, that is a big “IF” for the trust to be set up properly because most of the trusts just follow the basic “pillowcase of money” approach of distributions.
Does a Living Trust Offer Asset Protection To Kids?
I would say 9/10, if not more living trust that I review for Michigan estate planning clients have some form of the ” pillowcase of money” approach to distribution. What that means is, the way the living trust is drawn up-trust just launches pillowcases money at certain time frames for the beneficiaries. For example, the common distribution plan is one third at age 25 increased to 1/2 at age 30 and then the remainder at age 35. The problem with this is what happens if your child gets divorced at age 36? Well, then half that money might be lost in the divorce. I have been with child passes away at age 36? All that money may go to an in law, who we call outlaws, and then they may remarry. Leaving nothing for the grandchildren.
So what is the alternative?
A Legacy Inheritance Trust To Protect Your Children For Their Lifetime
An alternative to the pillowcase a money approach is to building a legacy inheritance trust for each one of your children. This legacy inheritance trust is a type of distribution plan that can be built into your revocable living trust. So, you can be in full control while you’re alive, but when you pass away instead of the money going to your children over periods of time, where could be lost to divorce, lawsuits, and death–instead, it would be protected for their lifetimes. In addition to the protection, they can have access to the funds as well as the peace of mind of knowing that whatever you have left them as their legacy would be protected for their lifetime from a divorce, lawsuit, creditor action, bankruptcy, and your bloodline would be maintained.
Very different than the typical pillowcase money approach of all right distributions at specific ages. Unfortunately, most of the trusts that I reviewed by other estate planning attorneys from our offices in Brighton, Livonia, Bloomfield Hills, or Novi contain only the basic outright distribution patterns. It is not known whether the other attorneys do not have the capability, the education, or just chose not to show the other options to these clients.
Are IRAs Protected From Divorce For Our Kids?
So let’s assume that you have adult age children, the question is is if one of those children are going through a divorce were separated are the IRAs protected? The answer depends on how the IRAs or retirement accounts are set up and how the trust is drafted, assuming there is a trust.
If the IRA specifically name the child is a beneficiary or contingent beneficiary, then when they inherit that retirement account, there probably is no protection from divorces, lawsuits, creditor actions, and most likely it will become a marital asset going to the in law upon death. We even have a Supreme Court case on this issue from 2014 that says inherited IRAs don’t have the same level of asset protection as your IRA does.
So to protect those inherited IRAs, you need to use a trust. However you cannot use any type of trust, because most trusts have outright distribution at certain ages. Again, this is the pillowcase a money approach.
If you want to protect those inherited IRAs for the next generation then there needs to be legacy inheritance trust provisions to preserve the asset protection for a lifetime for the beneficiaries. Unfortunately, of the trust that I review, and I’ve reviewed thousands, most trusts don’t have the necessary language to provide that lifetime of asset production.
Nor to most trust even include the basic IRA stretch provisions to allow inherited IRA to be stretched out over the lifetime of the beneficiaries.
Protect Your IRA and Retirement Accounts for the Next Generation
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So to summarize–if you have a large IRA you want to protect for the next generation then it is important to name your trust is a contingent beneficiary of that retirement account and then for you to ensure that your trust includes legacy inheritance trust provisions to protect the stretch out and protect the asset protection for the lifetime of your beneficiaries. If you have questions on whether your trust and IRA are protected I suggest you attend one of our upcoming estate planning workshops where we go over the necessary language to stretch out the IRAs for the next generation and the necessary language to protect your retirement accounts for your loved ones. Once you’ve attended one of our free, estate planning workshops, then set up a vision meeting with one of our estate planning and elder law attorneys to do an estate planning audit where we will review your estate plan and provided guidance on whether your current plan accomplishes your goals. If your current plan does not accomplish your goals, then one of our estate planning attorneys will review your options to close that gap and move forward with an estate plan that achieves your goals and protect your assets for the next generation.