Retirement Accounts Shouldn’t Go to a Revocable Living Trust

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Retirement Accounts Shouldn’t Go to a Revocable Living Trust

Money Mistake

By: Barry E. Haimo, Esq.

October 13, 2015

Retirement Accounts Shouldn’t Go to a Revocable Living Trust

In the right circumstances, revocable living trusts can be wonderful estate planning tools that can accomplish a wide variety of important goals. A revocable living trust can help you safeguard property and assets, while helping to reducing taxes and avoid probate. Revocable living trusts can be especially versatile tools, since—unlike irrevocable trusts—they can be altered and updated as your situation and needs change throughout your lifetime.

However, while revocable living trusts are effective for safeguarding some types of assets, there are other assets that cannot or should not be retitled into the name of your trust.  When you retitle the wrong kinds of assets—a qualified retirement account, for instance— things can go awry and become quite expensive.

Read on to hear the story of the Busemans, a family who made the mistake of trying to protect their 401k by retitling it in the name of their revocable living trust.

Monty’s Mistake

Monty Buseman could talk your ear off on the subject off mattresses.

All of Monty’s friends and family knew not to ask him for advice on buying a mattress— unless they were ready for an hour-long lecture on the benefits of firm versus soft mattresses or foam versus spring. Monty’s knowledge of mattresses served him well on the sales floor, however. He had been the employee of the month at his mattress store for three years in a row before he was promoted to manager.

As a salaried employee of the large mattress chain, Monty was entitled to benefits, including health-care, dental, and a 401k. Monty dutifully contributed 10% of his monthly salary every year for 25 years, dreaming of retiring in his own lake house in Michigan one day.

By the time he reached the age of 50, Monty was closer to reaching his dream of owning a lake house than ever. Business at his store was booming, and Monty was awarded with generous bonuses annually because of his exceptional performance and glowing employee reviews. Everyone at his branch loved Monty, and he was notorious for his hilarious standup sets that he would unleash at company holiday parties.

But Monty and his wife, Priscilla, had two girls that reached college age by the time he turned 50. Both had been accepted into expensive private schools in the Midwest, so he found himself a bit more strapped for cash than he was used to.

It was around this time that Monty had some heart problems that landed him in the hospital. He made a quick recovery, but the incident left him shaken. He realized he wasn’t the spry young salesman he had been when he first started at the mattress store, and decided it was time to start making arrangements for the future.

But between paying for his girls’ college tuitions and his expensive medical bills, Monty wasn’t exactly eager to spend money on a lawyer. He decided to handle his estate planning on his own—after all, how hard could it be?

After doing some research, Monty learned that creating a revocable living trust might be the best way to protect his assets and property for his wife and girls, while allowing him the flexibility to make changes as his family’s situation changed. He downloaded a generic form from the internet, and looked at online legal help websites for instructions and recommendations on creating revocable living trusts. On the document, he listed the names of his daughters and wife as beneficiaries, and named his close friend Derek as trustee.

It was all easy enough and he was quite pleased with himself—until it came time to decide what assets would go into the trust. One website recommended using the trust to safeguard items such as stocks, bonds, and savings accounts. Monty didn’t have much in the way of these assets, but he did have a hefty retirement account just waiting to be used.

He decided to retitle his 401k to his newly created revocable living trust, and didn’t think anything of it until he received the documents detailing the transaction from the bank that managed his 401k account. According to the statement, Monty had withdrawn all of the funds from his account. This hadn’t been his intention—he only meant to retitle the 401k to his revocable living trust for safekeeping.

In a worried phone call to his bank later, a representative explained that when qualified retirement accounts—such as 401ks and IRAs—are retitled to revocable living trusts, it is considered a complete withdrawal of funds. Since Monty had decided to withdraw funds before retirement, 100 percent of the value of the trust was subject to income tax.

In the end, Monty ended up losing a huge portion of his 401k needlessly. Had he consulted with an estate planning attorney, he or she might have advised Monty to name his trust as a beneficiary of his 401k instead. This would have been a way to make sure that the money was put into the trust while still protecting it from income tax.

The lesson? Revocable living trusts can be excellent vehicles However, estate planning mistakes can be both costly and destructive. Talk to an estate planning attorney, who can help you learn about the best types of estate planning tools for your unique situation. With the help of an attorney, you can draft these essential documents properly, ensuring your wishes are honored.

Barry E. Haimo, Esq.
Haimo Law

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