How a Standalone Retirement Plan Trust Shields Your Family from Divorce, Probate, and Nursing Home Spend-Down

 Posted on July 31, 2025 in Strategy and Asset Protection

For many families, the largest financial asset is not their home — it is their retirement account. Whether held in a 401(k), IRA, or similar plan, these tax-deferred assets are vulnerable to taxes, lawsuits, nursing home spend-down, divorce, and probate court if not properly protected.

Enter the Standalone Retirement Plan Trust (SRPT), a powerful, flexible tool that protects your retirement savings from unintended consequences and helps preserve your legacy for generations. This article walks you through the benefits of this trust and how it protects your family from hidden risks like probate, divorce, Medicaid spend-down, and tax surprises under the SECURE Act.

As of July 2025, Illinois families can create these irrevocable trusts to name as beneficiaries for retirement accounts. An Aurora, IL estate planning attorney can help you determine whether this planning strategy is right for your family.

What Is a Standalone Retirement Plan Trust?

An SRPT is a specially drafted irrevocable trust designed to be the named beneficiary of a retirement account. It is not the same as a revocable living trust. Instead of leaving the account to individuals, the account owner names the SRPT as the beneficiary. The account transfers into the trust when the owner dies, and the trustee manages the assets according to the terms set out in the document.

Although the SRPT must be irrevocable, it remains flexible. The trust is not funded during the owner’s lifetime, and the account holder can change the named trust at any time by updating the retirement account’s paperwork. The SRPT only becomes active if and when it receives the account after the owner’s death.

A Real Life Example: Jim and Mary Plan Ahead to Protect Their Children

Jim and Mary are in their early seventies. Jim has saved $850,000 in an IRA, and he is worried about what will happen to that money after his death. He wants to ensure Mary is financially secure if she needs long-term care. He also wants to protect their children’s inheritance, especially their son Mark, who is going through a divorce.

After consulting with their estate planning attorney, Jim and Mary set up a Standalone Retirement Plan Trust as the beneficiary of Jim’s IRA. This move protected their family wealth and helped avoid a hidden problem that could have cost Mark thousands during his divorce.

How Can a Retirement Account Cause Divorce Problems?

Before creating the trust, Jim had named each child directly as a beneficiary. While common, this approach has several hidden risks. If a beneficiary receives retirement funds outright, the funds:

• Must be fully withdrawn within 10 years under the SECURE Act

• Are treated as taxable income in the year they are withdrawn

• Can increase support obligations during a divorce or custody dispute

In Mark’s case, that increase in taxable income would have made his child support and alimony obligations higher — even though the money stayed in his account. This outcome was avoided by holding the funds in a trust and distributing them more gradually.

Choosing Between a Conduit Trust and an Accumulation Trust

There are two main ways to structure an SRPT:

A conduit trust requires that all required minimum distributions (RMDs) and other withdrawals be passed immediately to the beneficiary. This offers limited protection and can increase a beneficiary’s income during a divorce or lawsuit.

An accumulation trust allows the trustee to retain withdrawals within the trust and delay or limit distributions. This offers greater protection from creditors, divorcing spouses, government benefits disqualification, and long-term care costs. For example, Jim and Mary chose an accumulation trust, ensuring that the trustee could manage distributions for Mary and the children in a way that avoided tax consequences and potential litigation.

Many people assume naming individuals directly avoids probate. But that only works if everything goes perfectly. If a beneficiary dies before the account owner and there is no named contingent, the account may go through probate. Similarly, if a beneficiary disclaims their share, the court may need to decide who inherits.

A Standalone Retirement Plan Trust avoids those problems by clearly naming successor beneficiaries and outlining distribution instructions. Even if a beneficiary passes away or declines the inheritance, the trust remains valid and the trustee continues managing the funds under the original plan.

What Are the Benefits of a Standalone Retirement Plan Trust?

An SRPT offers multiple advantages to families in Illinois who want to protect their retirement savings:

It protects the account from being divided in a divorce, lost to long-term care costs, or taxed all at once during an unexpected life event. It avoids probate, offers control over distributions, and adapts over time as your life and family change. Best of all, it helps keep your intentions clear and enforceable, no matter what happens after you are gone.

This planning option may be appropriate if you:

• Have $250,000 or more in retirement assets

• Want to protect a spouse from Medicaid spend-down

• Have children or beneficiaries facing divorce or financial instability

• Want to avoid probate court delays and confusion

• Are concerned about how taxes or lawsuits could erode your legacy

Contact a Plainfield, IL Estate Planning Lawyer

At Gateville Law Firm, we help families use thoughtful legal planning to avoid probate, protect assets, and create lasting legacies. Our Aurora, IL estate planning attorney can help you decide whether a Standalone Retirement Plan Trust fits your needs and draft a plan tailored to your goals. Call us at 630-780-1034 to schedule a confidential consultation.