Retirement Planning and Meeting the Client's Objectives

Posted By Jay Kaufman || 4-Jan-2012

The Wealth Counselor provides helpful information regarding how to use IRAs and retirement plans to transfer wealth, addresses common misconceptions on this topic, and explains the importance of naming a trust as beneficiary. In this blog article, we will begin by covering the basics.

If after reading this explanation, you have any questions or concerns for your clients’ estate planning and retirement planning needs, please call my office to speak with me or my plan administrator, Kim Kaskel.

Surviving Spouse as Sole Beneficiary

If the surviving spouse is the only beneficiary, he or she can roll over the inherited benefits into his or her own retirement plan or elect to treat an inherited IRA as his or her own IRA. There is no deadline by which the spouse must make the rollover decision, but until the rollover is made, minimum required distributions would have to be under the inherited IRA rules based on the spouse’s age unless the plan requires more rapid distributions.

Planning Tip: A spouse who is under 70 1/2 can postpone distributions until he or she attains the age of 70 1/2. In addition, after rollover the spouse can name his or her own beneficiaries who can then use their own life expectancies after the surviving spouse dies, resulting in the maximum stretch-out.

Planning Tip: If the surviving spouse is under 59 1/2, special care must be taken in deciding whether and when to do a rollover. This is because distributions taken from the account after rollover and before the survivor reaches age 59 1/2 are subject to the 10% early withdrawal penalty.

For Illinois residents, if the spouse beneficiary does a rollover to his or her own IRA the assets will be protected from his creditors and predators under Illinois law. Note, however, once the surviving spouse has died, recent case law indicates that the beneficiaries of the inherited IRAs do not have the same asset protection. Thus, after an accident or lawsuit, a judgment creditor could take away an inherited IRA account. Naming a special retirement trust as contingent beneficiary can solve this problem.

Trust as Beneficiary

There are two common myths about estate planning for qualified retirement plans and IRAs:

(1) You cannot name a trust as beneficiary and get a stretch-out; and

(2) Naming an individual as beneficiary will result in a stretch-out.

The problem with naming an individual as beneficiary is that he or she is likely to cash out the IRA or plan account, thus negating the participant’s careful planning for long-term tax-deferred growth. Example: A 25-year-old inherits a $100,000 IRA. Will he choose a $60,000 automobile (the amount after cashing in the IRA and paying the income tax) or $400,000 in after-tax income over his or her life expectancy (based on 5% growth and combined state and federal income tax of 35%)? If the client’s goal is to preserve tax-deferred growth, it is advisable to have a trustee involved who will ensure that happens.

Normally a trust is a non-individual and cannot qualify for Designated Beneficiary status, but it is possible to name a trust as beneficiary and still have a Designated Beneficiary for purposes of determining minimum required distributions. Special rules allow a “see-through trust” that lets you look through the trust and treat the trust beneficiaries as the participant’s beneficiaries, just as if they had been named directly as beneficiaries by the participant.

Requirements for a See-Through Trust To qualify as a see-through trust, the trust must meet certain criteria:

(1) The trust must be valid under state law.

(2) The trust must be irrevocable or will, by its terms, become irrevocable upon the death of the participant.

(3) Certain documentation must be provided to the plan administrator by October 31 of the year after the year of the participant’s death.

(4) Trust beneficiaries who are to be included in the Designated Beneficiary determination must be identifiable from the trust instrument and all must be individuals.

A Designated Beneficiary need not be specified by name as long as the individual who is to be the Designated Beneficiary is identifiable under the plan. Thus, the members of a class of beneficiaries capable of expansion or contraction will be treated as being identifiable if it is possible to identify the class member with the shortest life expectancy. For example, “my descendants” is a class that can be identifiable even if they are not individually named.

Stand-Alone Retirement Trust

Using a stand-alone trust to receive retirement plan benefits is often the best solution. As you have seen, qualified retirement plans and IRAs are special assets with unique tax rules that provide well for accumulating wealth for retirement but do not work so well when trying to pass this wealth on to the next generation. It is always best to transfer property to the next generation in trust rather than outright. When the facts are such that an accumulation trust is best, it is difficult to draft it in a revocable living trust.

A stand-alone trust is an inter vivos trust created by the participant as grantor; it can be revocable or irrevocable. It is nominally funded during the grantor’s life and will receive retirement plan benefits upon the death of the participant by means of properly drafted beneficiary designations. In Illinois, the stand-alone trust is a handy asset protection solution.


Understanding retirement planning enables the planning team to help clients pass more wealth to their loved ones, integrate a client’s IRA with their estate planning, maximize continued tax-deferred growth, protect and grow IRA savings for their families, and take advantage of the rules applying to separate accounts governing IRAs and qualified plans so that each beneficiary can control his or her own inheritance.

Like other aspects of planning, it is helpful to review client retirement planning objectives and beneficiary designations frequently to ensure they coordinate with the client’s estate planning needs.

Categories: Retirement Planning

Contact Our Firm

Have questions? Fill out the information below to receive an immediate response.

Submit Your Message
Northbrook Estate Planning Lawyers

Office Location:

Kaufman Law Group, LLC
Northbrook Estate Planning Lawyers
707 Skokie Blvd,
Suite 600A,

Northbrook, IL 60062
Directions [+]
Licensed in Illinois


Main Office:

Follow Us On:

The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.