If you’ve talked to a financial planner about retirement, you’ve probably heard at least a little about creating a trust fund for retirement. In summary, a retirement trust fund is an irrevocable trust whereby assets (money, securities, property) are transferred to a trust and then managed by a trustee for the benefit of the primary beneficiary or beneficiaries. Secondary beneficiaries can be specified so that the trust assets can be transferred to heirs and the trust closed. Is this something you should consider? Here are the pros and cons of creating one:
First, the advantages. Because the assets are transferred out of your name and your control, your total net worth will be greatly reduced in the eyes of the government. This could be crucial to the benefits that you can receive from the government, including health care, disability, and other programs that are based on financial assets. This is a pretty big advantage. Also, if during retirement, you are confined to long term care or have a sickness with large medical bills, your assets are protected and your nest egg will not be depleted. Another pretty big advantaage. Another advantage is that, upon death, the transfer of assets via a trust is typically much easier than other methods, as the assets themselves can be transferred without liquidating or the probate of a will.
Now for the disadvantages. The biggest disadvantage is that the trust is irrevocable. Once you transfer assets they are no longer in your control. And if there were any oversights in the bylaws of your trust, they are nearly impossible to correct. And if circumstances change or you want to remove beneficiaries, it is difficult. If you decide that you want the assets back to make a purchase or do something drastic, it is unlikely that you will be able to undo the trust. Overall, the biggest disadvantage is that you do not have control of your own assets. Another disadvantage is that you have to pay a trustee to manage the assets and make distributions. Over the years, this can add up to quite an expense.
So, given the pros and cons of creating a retirement trust fund, is it right for you? I guess that depends on what type of control you like to have over your assets. You can get some of the same benefits with a living trust, but if you don’t mind the lack of control and are worried about government assistance or long term care and medical bills, then I guess its not a bad choice. Consult a financial planner to learn the specific tax implications and benefits for your situation.