Why should I designate a trust as a retirement account beneficiary?

Ralph
00:00:00

Have you ever wondered what would happen to your retirement accounts if something unexpected happened to you? Well, today we're tackling a crucial question that could save your family thousands of dollars in taxes and headaches.

Stay tuned as I share my personal journey with setting up a trust as a retirement account beneficiary decision that brought my wife and me incredible peace of mind. You don't want to miss that on today's show.

Podcast Announcer
00:00:28

Welcome to the Ask Ralph podcast where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now here's your host, Ralph Estep Jr.

Ralph
00:00:56

Well, welcome to the show. Thank you for joining me today as we continue our journey together with the quest of mastering our finances from that Christian perspective.

Now, if you missed yesterday's episode, we talked about new tax issues coming in 2025. So if you miss it, I'm going to encourage you to catch up on that because those changes will impact your wallet and you need to be prepared.

So go back to askgraph.com and check out yesterday's episode.

Well, today's listener question comes from Michael in Tennessee and he write this Dear Ralph, I recently inherited my father's IRA and the distribution process has been a nightmare. I don't want my children to go through this same experience.

My financial advisor mentioned something about naming a trust as a beneficiary for my retirement accounts, but I'm confused about whether this is the right move. Can you help? Well, Michael, I am here to help you today and I want to start by telling you, Michael, I am not an attorney.

So ultimately this question is a great question to ask your attorney, but today we'll talk about some of the common sense side of it. And I've been through this myself, so I'm going to share my personal experience with making this decision.

Now before I get started, I want to remind everyone that you can submit your questions for this show just go to justaskralph.com or you can join me on Tuesday nights when I go live. Every Tuesday night, 7pm Eastern Standard Time, just go to ask ralphpodcast.com/live. I would love to see you there.

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Michael, I was thinking about your question today and how I could fit that into a Bible verse. And I found this one in Proverbs. It's in Proverbs, chapter 13, verse 22. And it tells us this when I've used this on the show before.

A good person leaves an inheritance to their children's children. Well, I don't know about you, Michael, but I think that's a worthy goal, isn't it?

And this verse reminds us that wise financial planning isn't just about us, it's about blessing future generations. So that's exactly what we're going to talk about on today's show.

Well, Michael, as we get started, let me share my story with you and how my wife Jennifer and I made this decision that you're thinking about. And it all goes back to when my wife was diagnosed with breast cancer. And I want to talk a little bit about that. It was back in 2005.

We had just started our own accounting practice. My kids were really young, I think at the time. My youngest was maybe two and the oldest was about five or six.

And here's where God saw us through the whole thing.

We had just started our practice that January, literally the end of January, and it wasn't a month or two into that they were able to get health insurance. And it was just my wife and I working in the office. And she got this diagnosis and it was devastating.

And she faced the reality that I might be raising two boys on my own and I faced the reality of losing my wife. And let me just tell you, that's the kind of thing that will bring you to your core. And it made us think about some things.

But I'm happy to say that God saw us through all that. And it's hard to believe that was 20 years ago. And yes, Jennifer is doing great and she's cancer free.

And then in 2023, I experienced the loss of my mother to brain cancer.

And that gave us what I'm going to say is profound understanding about just how precious life is and how proper estate planning isn't just about money. It's not, when I looked at it, it's not just about money. It's about love.

It's about responsibility and making sure you're taking care of those people like the Bible verse mentioned for future generations. So it was last year Jennifer and I sat down with our estate attorney. I mentioned that we took a trip to Germany last year.

So we were getting ready for that trip and I Said, you know, this would be a great time to take a look at our overall estate plan, take a fresh look at it. And as we were sitting down, Kevin's my attorney. I did an episode with him back in February. I encourage you to check it out.

But we specifically talked about everything in our investments and everything in our retirements. And meeting with him, you know, truth is, life had taught us a lesson that tomorrow is never guaranteed.

And while Jennifer triumphed over breast cancer, it reinforced our commitment to ensuring that our adult children would be protected. Because my children aren't little anymore. They're 23 and 27.

So we sat down with the attorney, and we had what I would call a truly enlightening conversation. And he talked about this thing called a revocable living trust.

Now, Michael, this isn't exactly what you're talking about, but it's the conduit to get there. And Kevin explained to us how these benefits would be so much better than that simple will. It had things that a simple will couldn't match.

And see, Jennifer and I came to a realization that this wasn't just about passing on wealth. Our trust was also about passing on our values. And it was about creating a meaningful legacy that reflects our Christian faith.

And so, Michael, I want to share with you and the listeners today what Kevin shared with me about the key benefits. So let's talk about those. Number one thing with setting up one of these revocable trusts is you have what's called strategic distribution.

And here's what that really means. So the trust gives you precise control over how and when your retirement accounts are distributed, how those assets are distributed.

It's in your control. For example, we structured our particulars trust to provide for measured distributions at a specific age milestone for our adult children.

Because we felt like that was better than just giving them this lump sum all at once. And think about it. This approach helps prevent the overwhelming responsibility of managing a large inheritance all at one time.

With the overall goal was to allow our adult children to find their financial footing. That's the key to this. So that's the first thing we looked at, strategic distribution. Second thing, tax efficiency. I'm a tax guy. I'm a tax expert.

That's what I do. And through this trust planning, we discovered there was multiple ways to minimize tax implications.

We work with our attorney, like I said, this is something you want to work with your attorney to create these documents.

And we structured distributions in a way that could potentially reduce that tax burden in the future so that when our children inherit these assets, they don't get nailed with taxes. And the trust also allows us to incorporate tax efficient charitable giving strategies. These are things called donor advised funds.

I talked about those on the show from time to time. And that gives us immediate tax benefits while we're supporting causes we care about.

Like I said, Jennifer and I came to the realization that it wasn't just about providing for our children, it was providing for our faith and making sure we incorporate our values. So that's the second key to this tax efficiency. Number three, privacy protection and probate avoidance.

Now, I've seen so many clients, I've seen so many friends go through this probate process if it's with their parents estates or their grandparents estates. And Jennifer and I truly appreciate how a trust keeps our family financial matters private. Well, in my case, at least semi private sense.

I'm sharing some of the basics here, but I'm not getting into the specifics. I'm just giving you some overall things. And see, unlike a will, which a lot of people don't know, this, a will becomes public record.

This trust maintains complete confidentiality. And at the same time, it ensures our assets transfer smoothly to our beneficiaries because we lay that all out in the trust document.

So that's number three. And that's that privacy protection and probate avoidance if you have a trust. Again, I'm not an attorney, I'm not giving you legal advice.

My understanding is it's going to get out of that probate because it goes directly to the trust. Let's look at number four. And that's kind of the thing I was talking about. We talked about our vision and our faith.

And that's number four is legacy building with purpose. And in our particular trust, we integrated charitable giving opportunities.

We wanted to make that part of our trust, something that aligns with our Christian values. And the trust allows us to establish what's called donor advised funds. And also if we want to, we can create charitable remainder trust.

And the benefit to those is they not only support causes we believe in, but they also provide potential tax benefits and income streams for our beneficiaries. And that was important to us. So that's number four. And that's that legacy building with purpose. Let's look at number five.

And this one is a great part of a trust and that is you have the opportunity to regular review it and it offers flexibility. And I found this a particular value. It's the ability to review and update our trust as circumstances change. And listen.

This became especially important as we watched our Children mature and their needs evolved. Now all of a sudden you've got one son that's married, maybe he's going to have children.

So our trust includes provisions for those regular reviews because it's not one of those things where you just set it and forget it. And it allows us to adjust our plans based on those life events or changes in our financial situation.

And this is critical because if you're like me, you realize that life changes, it's constant. That's one of the things that is true about life. Life is constantly changing.

So one of the benefits to this revocable trust for us was that ability to have that regular review and provided flexibility. And last but not least, number six is what I call comprehensive asset management.

Because here's the thing the trust forced us to do, the trust forced us to take a complete inventory of all of our assets. What properties do we have, what are our investments, what are our retirement accounts, what are our life insurance policies?

And that was also critical because this comprehensive approach makes sure that nothing falls through the cracks. That's the worst possible scenario. You want to make sure that all of your assets are properly managed and distributed according to your wishes.

When I did that show with Kevin, and I'll put a link to it in the show notes, one of the things we talked about for a few minutes was that, listen, for the most part, you can't control when you're going to pass away, but this is a way to give control to what happens after you pass away. So that's number six. And that's that comprehensive asset management. That's all part of the process of putting this trust together.

Now here's what makes this especially powerful. Michael, you're asking me for, you know, big what is your opportunity? What is your idea? Ralph?

So by combining these benefits, we've created a robust framework that not only protects our assets that was important to us, but it also ensures that they're distributed in a way that reflects our values and supports our children's long term financial well being. That was the key to us.

We didn't want this money to fall into their laps and all of a sudden they blew through it quick, you know, out buying sports cars and all that kind of stuff, because you know how kids are. And I see kids minor 23 and 27, they don't have that financial footing that some of us who are older have.

And listen, Jennifer and I spent a considerable amount of time, we went through our assets like I talked about. We went through the things that we own.

We looked at properties, we looked at investments, and we had to have those hard discussions about how we wanted them managed. And listen, we face those serious health challenges ourselves. Jennifer went through it.

We understand the importance of having everything properly arranged. And our experience taught us that peace of mind comes from knowing that you've taken care of those you love, even in difficult circumstances.

You know, for us, we looked at it like this. If our children's parents are no longer with us, how can we make that process easier? Of course, we can't change the emotional impact of that.

They've lost their parents. I went through that with my own mother in 2023. There's nothing anybody can do or say to change that emotional impact.

Sure, people can say, I'll pray for you, Ralph. And I appreciated all those prayers. I appreciated people who reached out to me with just a kind thought.

But this is a way for you to concretely help your beneficiaries or help the people that you love move on with their lives after you're no longer with us. Like I said, you can't change the emotional side. But this was really important to us.

And like I'm saying right here, the process of establishing our trust wasn't just about legal documents. It got so much bigger than that.

When we first went to the attorney, my wife and I thought, okay, well, we're going to walk in here, we're going to sit down with Kevin. We're going to hash out all these legal documents and just move on. But it was so much larger than that.

It became a profound expression of our love for our children, and it really manifested it, our desire to ensure they're protected no matter what life brings. And then we make sure to include regular review periods in this.

We want to keep up the date and make sure our trust is updated as circumstances change. You know, like I said, maybe my youngest gets married, maybe there's grandchildren. So, Michael, that's my story.

And that's why I think you really should consider creating a trust. But that said, there are some considerations that you have to weigh in. Number one, there is a cost.

Setting up a trust requires more upfront legal fees than a simple will. It's just true. So maybe you schedule a consultation with an attorney and talk about your options and look at what's best for you.

But there is an initial cost, and that's going to cost you more than a simple will. Second thing, maintenance. Here's the thing about a trust. Maybe with a will, you just set it and forget it.

But with a trust, we need to ensure Our trust stays updated when life changes.

So if we have that grandchild or we have those grandchildren or there's a divorce or a marriage or something like that, with a trust, we want to make sure we ensure that our trust stays updated with those life changes. And of course with those updates comes initial cost and number three complexity.

A trust document is more detailed than a simple beneficiary designation. It just is. Like you can get in touch with your 401k plan or your IRA and just say, hey, I want to make the beneficiary designation.

And listen, I did a show about this a week or two ago. Make sure you check these things. Make sure you're checking them at least annually and naming a beneficiary.

But putting a trust into this is a little more detailed than that simple beneficiary designation. But I think if you listen to me today, Michael, you're like Ralph. That kind of makes sense to me. I want to have that control.

I want to be able to do the things you talked about. So I'm going to share some practical steps you can take in just a few moments. But let me ask you this.

Has Ask Ralph helped you make smarter money moves or has it helped you strengthen your faith walk? If so, let me ask you to pay it Forward in just 30 seconds. I'm going to ask you to do some things.

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Share this episode in your favorite social media site. Just go and make a post and say, hey, I listened to this guy Ralph. It's on askralph.com and he's really helped me.

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Now I promised you I would talk about some practical steps, Michael, and here they are. Number one thing and Jennifer and I had to do this when we put our trust together.

You got to take inventory of your retirement accounts and other assets. List them all out.

Because when you make that consultation appointment with I'm going to get to next with the attorney, you're going to need all that information. Which leads me to number two and that is consult with an estate planning attorney who can provide guidance based on your specific situation.

Now you don't want to just go to any attorney. You want to make sure when you're looking for an attorney that you find an attorney that works with estate planning. That is crucial.

Number three, here's where you can talk about those charitable giving opportunities. So when you're meeting with your attorney, you might want to consider a charitable giving your estate plan that aligns with your values.

And number four, and don't forget to do this. Jennifer and I put this on our calendar. You've got to plan to regular review especially the documents after life's major events.

And remember, this is about more than money. I hope you're hearing that. It's about stewarding the resources that God has blessed us with and caring for our loved ones. That's really the key.

Now before I wrap up on our mind you about tomorrow's episode. Tomorrow we're going to discuss how to handle auto insurance when your kids are away at school. That's another crucial topic for many parents.

And remember, as I close today, my passion is to help you achieve financial success. I want to see you live out your dreams and I want to see you grow in your faith.

And I know working together we can master your finances from a Christian perspective. So as I always end this show, stay financially savvy out there and may God bless you abundantly.

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