Investment, Insurance, Annuity, and Retirement Planning Considerations

If your clients choose to use a Standalone Retirement Trust (SRT) to provide asset protection benefits for their beneficiaries, the tax-related asset allocation strategy would be essentially the same as without an SRT, with one small exception.


To help minimize additional tax consequences, consider skewing your investment plan toward:


  • bonds, REITS, and other assets that produce ordinary income;
  • housing stocks, ETFs, and other qualified-dividend generating investments in taxable accounts; and
  • placing any high-growth assets in Roth or inherited Roth IRAs.


WARNING: SRT Tax Consequences


One small exception is that if your SRT is designed as an accumulation trust (often necessary for asset protection), then the undistributed Required Minimum Distributions (RMDs) accumulating in the trust will face tightly compressed income tax rates. If the undistributed annual RMDs exceed $12,500 (2018), the SRT is hit with a 37% marginal tax rate, possibly much higher than a beneficiary’s personal income tax rates. It is very important to work closely with the trustee and the client when income will actually be accumulated in an accumulation trust.  For this reason, you might select assets with low period income that you believe belong in a client’s total portfolio for the accumulated balance in the SRT. Examples of these assets might be cash, short-term bonds, etc.


Always Use an SRT?


Of course not. No planning is one-size-fits all. There may be cases where your client’s circumstances do not warrant the hassle and expense of creating an SRT. An example might be if the inherited IRA is quite small in relation to all the other assets your client is protecting. In such cases, here are some other approaches to consider:


  • For clients who are still working but not fully funding their workplace retirement plan (e.g. 401(k), 403(b), 457, SIMPLE IRA, SEP IRA, etc.) accelerate the depletion of the beneficiary IRA and use the extra taxable cash flow to max out tax-deferrals into the workplace plan. If for every dollar pulled from the inherited IRA an additional dollar is contributed to the workplace plan, the tax impact is neutral but the assets are now easily consolidated into a single account.


  • For clients who are in retirement, if the optimal liquidation strategy in their case is to consume qualified assets first (as might be the case for those who enjoy a window of low income tax rates between retirement and deliberately delayed Social Security benefits), then consider consuming the inherited IRAs first of all.


  • Depending on the circumstances, it may make sense for the client to hasten withdrawals from the inherited IRA to fund 529 plan contributions, to fund life insurance premiums, to fund Roth IRA conversions, HSA contributions, etc., in order to pass assets to heirs through those sorts of channels instead.


As a note to insurance agents or annuity-oriented brokers, although qualified longevity annuity contracts (QLACs) were approved in 2014 for a portion of the assets in one’s own IRA, they are not allowed in inherited IRAs.  In addition, even though life insurance is allowable in ERISA plans, it is not allowable in inherited IRAs just like in an individual’s IRA.


Team Up with Us


We’d be happy to answer all SRT and retirement protection questions.  Please feel free to call with questions or if you’d like help planning for a client.  It takes a village.

Posted in IRA