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Protecting Your Retirement Savings with a Trust: Potential Problems

When considering the creation of a trust for the purpose of protecting retirement savings (IRAs) and passing them down to children and loved ones, there are several things to consider and a few stumbling blocks that can get in the way. Still, with the help of an experienced estate planning attorney, you can do a lot to ensure that an IRA will be around for a long time to come.

One of the biggest hurdles faced by those considering such a trust is the question of whether or not an inherited IRA is protected from creditors, say, if your child files for bankruptcy. If you were to file for bankruptcy, your retirement savings would be protected, but courts across the country have reached different verdicts on whether or not an inherited IRA should receive the same protection.

Another thing to keep in mind is the fact that, as of now, the IRS does not really allow for "clarification of inheritance." For example, if your child were to attempt to clarify him or herself as the recipient of your retirement savings, the IRS would essentially refuse modifications to what is on paper.

The key takeaway, as Kelly Greene states, is get it right the first time and explicitly state your intentions within the estate plan.

Suppose you have more than one child and plan to include both as recipients of your IRA trust. The way a trust works, when constructed for this purpose, is based on an estimation of your eldest child's lifespan. This estimate determines the yearly payout.

Understandably, this can cut the younger child(ren) a bit short. You may get around this by setting up "conduit trusts" for each of your children, with each trust as a beneficiary of your IRA retirement savings.

Once transferred to the separate trusts, the money may be parceled out as fit. It is also possible to set up a conduit trust with a sort of kill switch, allowing you to make a change to the trust if the situation changes or you change your mind.

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