Planning with Retirement Plans


Volume 1 • Issue 4 • August 2011

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning, and charitable planning issues. This month's issue will discuss Planning with Retirement Plans so they are integrated and coordinated with the goals and objectives of your estate plan. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.

The Need for Planning with Retirement Plans

According to a recent report Americans hold $17.5 trillion in Individual Retirement Accounts or other qualified retirement plans. In most instances the extent of the planning, and often the planning advice, has been to name proper beneficiaries. It is important to understand that in estate planning your beneficiary designation trumps all. Even if your will or trust calls for a different result, the beneficiary designation will control. Experience has shown that planning only with beneficiary designations often undermines other planning and leaves the retirement account subject to the potential claims of creditors or a divorcing spouse or the imprudent spending decisions of short-sighted beneficiaries. There is, however, a better way. With proper planning you can provide beneficiaries with asset protection and maximize the retirement account “stretch.”

Asset Protection of Qualified Plans and IRAs

One problem with qualified plans and IRAs is asset protection. Asset protection for owner's qualified plan accounts is provided under federal law, while any protection that exists for IRAs is provided only under state law. Care should be taken to avoid combining an IRA rolled over from a qualified plan with one that was not. Doing so can jeopardize asset protection in bankruptcy.

When it comes to beneficiaries, many courts have held that the protections available for IRAs do not extend to inherited IRAs. A consistent theme in these decisions is that Congress did not contemplate asset protection for anyone other than the worker (or the worker's spouse after a spousal rollover).

Found Money!

A second major problem in planning for qualified plans and IRAs is the "found money" syndrome. Those who put the money in IRAs and qualified plans are often loath to take out even the required minimum distributions. Your beneficiaries often do not share that inhibition. Instead, they view their inherited IRA or qualified plan account as “found money” to be withdrawn and spent and as a result lose the growth that can be obtained by maximizing the “stretch”. The “stretch” is simply stretching the distributions over the lifetime of the beneficiary allowing the retirement account to grow tax deferred. Let’s look at the example of a $100,000.00 account left to a 30 year old child. The child could cash in the IRA presently, as most do, for $100,000.00 less income taxes or choose to “stretch” the distributions over his life expectancy. If the funds earn an average of 7% over that period of time projected distributions would be in excess of $1 million. Change that beneficiary to a 10 year old grandchild and the projections increase to over $3 million.

A Better Way!

Fortunately, there is a better way! You can provide asset protection for your beneficiaries and ensure that they maximize the benefit of tax-free compounded growth. The answer is the Retirement Plan Legacy Trust™. The Retirement Plan Legacy Trust™ is a stand alone trust drafted specifically to comply with the complex rules regarding qualified plans and IRAs.

Establishing a Retirement Plan Legacy Trust™ and naming it as the beneficiary of an IRA or qualified plan can provide a number of benefits. These include:

  • Protecting the individual trust beneficiary from his or her temptation to waste "found money." The Trustee you name is in control of how quickly monies can be disbursed from the Trust.

  • Predator protection - Even if the individual beneficiary does not have spendthrift tendencies, there are many out there whose interest lies in separating the beneficiary from their money and property.

  • Creditor protection - Ours is a litigious society in which we never know who is going to be the target of a lawsuit. A trust makes the beneficiary a less attractive "target."

  • Divorce protection - With the national divorce rate above 50%, it is impossible to determine which marriages will stand the test of time. A Retirement Plan Legacy Trust™ keeps the inherited IRA from being divided or even lost in a divorce.

  • Government benefits protection - As with divorce, whether a healthy beneficiary will suffer some catastrophe that makes him or her dependent on needs-based government programs is unpredictable. Inheriting an IRA can easily disqualify someone from receiving needs-based government benefits until the IRA is exhausted.

  • Providing consistent investment management.

  • Estate planning.

  • Control over use of the retirement plan/IRA assets (e.g., to fund education, start a business, or buy the beneficiary's first home or, in the case of a mixed family, to prevent diversion away from the owner/participant's descendants).

While most individuals still choose to give their children their inheritance directly, the wise ones often choose to leave the inheritance in trust.  Engaging in this type of planning while ignoring the retirement accounts can seriously undermine your goals and objectives.  A Retirement Plan Legacy Trust™ allows you to coordinate with your retirement accounts with your other planning to provide the maximum benefit to your beneficiaries.  Please let us know if you are interested in learning more details about the Retirement Plan Legacy Trust™.


Whether it is retirement accounts, life insurance or otherwise planning with beneficiary designations can often lead to unintended consequences. Here are some common mistakes we run into in reviewing beneficiary designation forms:

  • You can’t find the form. Without the form you are stuck with whatever default your plan calls for, probably your estate, which means probate.

  • The form is out of date. You have had a new child or remarried. Have you updated your form? The beneficiary designation will control.

  • No secondary beneficiary named. If your first choice is no longer around who gets the money? If you haven’t named someone see mistake number 1.

  • Naming a minor. This will result in an automatic trip to the probate court with the minor getting the full amount when he/she turns 18.

  • Failing to coordinate with your Will or Trust. Just what did you mean when you wrote that beneficiary out of your Will or Trust? Beneficiary designations control so that beneficiary will likely still receive under the beneficiary designation if not corrected.

  • Naming a traditional trust as the beneficiary of a retirement account. You may lose or diminish the ability to obtain the tax deferred stretch of assets in these accounts.


One of the ideas we promote is the need for ongoing maintenance and review of your estate plan.  The most recent example of this need comes from the ongoing litigation of the estate of the late entertainer James Brown.  The Godfather of Soul can’t “feel good” that his estate is still in dispute nearly five years after he passed.  But, this quote from a recent Forbes article is telling: “James Brown passed away with at least nine children, three ex-wives, and a woman who may or may not have been his widow.  This woman, Tomi Rae Hynie, was technically still married to another man when she tied the knot with James Brown (although that marriage was later annulled, reportedly).  Hynie also had a child named James Brown, II, which may or may not have been fathered by Brown.  To complicate the estate, Brown never updated his will or trust during his five-year marriage to Hynie, so it was unclear if he did or did not want to include Hynie or his new son.”

Had Mr. Brown engaged in a regular review these problems may have been averted and his intentions made clear.  We recommend an annual review of your estate plan to ensure it remains up to date and fully funded.

This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.