There are good reasons to name a trust on a retirement plan such as a 403b and 401k or IRA. If the IRA beneficiaries are young, disabled, or just not able to manage assets, then a trust can do it for them. People in a second marriage or relationship may want their spouse or partner to benefit from funds as well without depleting them entirely. Trusts provide protection from the beneficiary creditors, but may not protect your retirement funds from your own creditors. 

Creditor Protection from retirement plans

     IRAs are protected from creditors while you are alive. If you get sued, the IRA can be subjected to claim unless you declare bankruptcy. Under federal bankruptcy code, the first $1,362,8000 of retirement assets are protected from having to be past to creditors and most cases style. You can usually get this protection without having to go through the bankruptcy process. 

Only During Life

     Protection for these types of accounts end at death and does not apply to inherited IRAs or those you leave to others. Inherited IRAs are subjected to creditor claims. However your heirs are not liable for your debts, so if your retirement plans pass directly to them then they will be protected from your debts. 

    If someone dies owing $400,000 to creditors and they have an estate worth $500,000 divided between various assets the creditors could only take from the assets. If the person who died left $150,000 in a retirement plan that was directed to be paid directly to an individual’s heirs, then they will not be subjected to the person’s debt. The creditors would come up $150,000 short. 

Revocable trusts subject to claim

     If the IRA was payable to the individuals revocable trust then it could be subjected to claim. If there are not enough funds in the descendants probate estate to pay their debt then the states will often allow creditors to go after revocable trusts.

Conclusion

     If you have a lot of debt its best that you do not make your retirement payable to a revocable trust. Make it payable either directly to the beneficiaries, or an irrevocable trust. If your assets overcome your debts by a large amount then its best you do it the way you want. The best way to protect your future is to consult your local elder law attorney. This will help you protect that which belongs to you.