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  • By: Higher Ground Legal
  • Published: March 26, 2024
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As life expectancy continues to rise, and the wonders of medical care make the previously miraculous mundane, our retirement assets become all the more vital. Yet those assets have significant vulnerabilities and may not be as safe as you think. This article dives into the why and how of retirement asset protection in Maryland by discussing:

  • The three big dangers retirement assets need protection from.
  • What a retirement trust is, and how you can benefit from using one.
  • How to create and fund a retirement trust in Maryland.

Why Would You Need To Protect Your Retirement Assets?

Retirement assets take a lifetime to build up, but they can disappear a whole lot faster. There are three big dangers that all retirement assets face in one way or another: risk, fees, and taxes.

Why Is Your Retirement Asset At Risk?

The first thing that you really need to protect your retirement assets from is market risk. There are two major ways this can undermine your retirement asset: sequence of returns risk and longevity risk.

Imagine that during the early years of your retirement, you are pretty bad for the market, but you still have to spend money to cover your costs and living expenses. You will start to run out of money very quickly if there are bad years early on if your money is not protected from such sequence of returns risk. The other danger, which is becoming increasingly common, is longevity risk from living too long and running out of money as a result.

Both sources of market risk, the sequence of returns risk and the longevity risk can work separately, or be truly catastrophic when compounding with each other. But they are not the only dangers.

How Can Fees And Taxes Eat Away At My Retirement Funds?

In addition to shielding your retirement assets from risks, you will want to protect them from   and taxes. While fees might seem easy enough to anticipate and avoid, taxes are notoriously inevitable.

Taxes include both estate taxes and income taxes. Retirement assets are usually tax deferred, which means whenever you spend that money or whenever your kids spend the money they inherited from your tax asset, they have to pay tax income tax on that.

You can protect retirement assets from taxes by moving them strategically to tax-free accounts over time such as a Roth 401k. An attorney experienced with both tax optimization and estate planning can help you make Roth conversions by calculating the optimal amount to convert each year.

How Can I Protect My Retirement Assets For Myself And My Beneficiaries?

The big three, risks, fees, and taxes, make up the bulk of the danger for your retirement assets, but there are other problems out there you can run into.

While retirement assets are usually protected from creditors (depending on the state), you don’t usually need to put them under any sort of liability protection, and you cannot put IRAs or retirement assets in a trust while you are alive. That is illegal, unfortunately; what you can do, however, is set up a retirement trust specifically to receive them when you do pass away.

What Is A Retirement Trust?

A retirement trust is a trust specifically set up to receive your retirement assets when you die by making this trust a beneficiary of that account. This is required because you cannot put your assets into that trust now because you cannot have an IRA that’s owned by a trust. It has to be owned by a person.

What Are The Benefits Of Using A Retirement Trust?

If you designate your trust as the beneficiary of the IRA or other retirement asset, then you can exercise a lot more control over how the money gets passed on. If you make your child the beneficiary directly, he or she will get all the money right away with no restrictions or safeguards.

If you want to have any restrictions for responsible behavior, lifestyle, or age at which the funds become available, then a trust allows you to do so. Your retirement does not even have to be separate from any other revocable living trust you have set up as part of your estate planning package.

They can be handled in the same trust document, which is one of the advantages of working with an estate planning firm that is also familiar with tax optimization and retirement planning and protection.

How Does A Retirement Trust Work To Protect Your Assets In Maryland?

A retirement trust, like other forms of revocable living trusts, helps you pass assets along smoothly without the delays and costs of probate while also exercising control over who benefits from the money and how.

Even if you do not need or want to have specific provisions in the trust to handle retirement assets, you do not want to end up with your beneficiaries having to pay all those taxes in one go. To avoid this, you can add provisions such that when the money goes into the trust, the beneficiaries can take it out over a 10-year period instead of taking a lump sum immediately and paying all the taxes.

If you make the trust a beneficiary, you need to have the trust set up specifically so that the taxes are not increased, they will be the same as they would have otherwise been.

A retirement trust can also prevent creditors from accessing that money. If your kids have creditors when you die, and they get a lump sum from you, all the money could be wiped out in order to pay a big debt. But if you leave it to the trust instead, and the trust pays out a little bit each year over ten years, then that can help with creditor protection. In addition, during that time, the remainder of the assets could still be growing. Unfortunately, the new IRS rules do not allow you to stretch IRAs any longer, so the kids will have to take out all the money within ten years.

This is the kind of careful attention that requires the work of experienced attorneys, as you can easily make the mistake of forgetting such details when trying to do so on your own.

How Is A Retirement Trust Created?

Trusts are written into existence with the help of an experienced attorney. They will draft the document creating it for you, and you will identify the money, property, or other assets that are going into it.

That document will also identify the trustee in charge of handling those assets and their distribution, as well as how to identify new trustees should the need arise. Finally, it will outline who the beneficiaries will be, how and when they get access to the money held in the trust, what kind of restrictions there are, and how the taxes are handled.

Once you are happy with the document, you sign it and fund it, and your trust is valid and in force.

What Type Of Retirement Assets And Benefits Can Be Put Into A Retirement Trust?

Technically speaking, you cannot put any retirement assets into a trust directly. What you can do, however, is make the trust a beneficiary for those assets and accounts in the event of your death. In which case you can do so for any retirement account or asset that has a beneficiary.

How Can I Fund A Retirement Trust?

All trusts have to have some kind of value in them to be created. Since you cannot fund it with your retirement asset (because you have not died), it is a commonly accepted practice to put at least a small amount of money, even just $20, into the trust so that it can exist.

That value then sits there, keeping the trust open as a holding place for future retirement assets, which will be sent there when you die by beneficiary designation.

Your estate planning and asset protection attorney will help you through this and every other step required to set up the trust so that it will offer maximal protection to your retirement assets.

For more information on Estate Planning For Retirement In Maryland, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (301) 396-7576 today.

Image of Attorney Daniel Razvi, Esq.

Daniel Razvi is a versatile Maryland attorney focused on providing tax and risk-optimized estate planning services. Attorney Razvi brings considerable experience and a unique perspective to the field of estate planning thanks to his comprehensive approach, which includes retirement planning, estate planning, and tax optimization.

For comprehensive and strategic insights into the field of Maryland Estate planning, connect with lawyer Daniel Razvi and his law firm, Higher Ground Legal.

Call Now (301) 396-7576

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