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Protecting Inherited Retirement Accounts

September 22, 2014 Douglas Davis

Until recently we didn’t worry too much about inherited IRA’s because they have always been protected from creditors, predators and some marital claims. That recently changed when the Supreme Court decided Clark v. Rameker, 573 U.S. ____ (June 2014). The court in that case held that funds in an inherited IRA are not considered “retirement funds,” and are therefore not protected from creditor claims.

The Court identified three characteristics of an inherited IRA which led to its conclusion that they are not “retirement funds,” and to our conclusion that these accounts will not be protected from creditors or marital claims:

  1. Inherited IRA owners may never invest additional money in the account;
  2. Inherited IRA owners must withdraw money from the account, regardless of retirement age; and
  3. Inherited IRA owners may withdraw the entire balance of the account at any time, with no penalty.

Because of these factors, inherited IRA’s are not considered to be “retirement funds” and do not qualify for the creditor or marital protection available to retirement funds.

How can you ensure that IRA’s left to your spouse or children are protected, preserved over time, obtain favorable tax treatment (“IRA stretch”), are protected from creditors, predators and a beneficiary’s evil spouse? A Standalone IRA Trust may be the best solution for you and your family. By creating a Standalone IRA Trust during your lifetime and naming the trust as the beneficiary of retirement accounts, significant protection and benefits can be obtained.

A Standalone IRA Trust solution (1) ensures continued management of retirement assets during your lifetime and the lifetime of your spouse and children or other beneficiaries; (2) provides asset protection from creditors after your death; (3) ensures that your beneficiary’s inheritance is protected from marital claims of their “evil spouse;” (4) provides flexibility for blended families, allowing an IRA to be used for the benefit of a surviving spouse without risking accidental disinheritance of children from a prior marriage; (5) avoids probate and governmental interference with the investment; and (6) qualifies for the IRA stretch while permitting payment of required minimum distributions to designated beneficiaries.

An IRA Trust can also be structured to maximize tax benefits by ensuring the payment of required minimum distributions over a period of time, rather than taxing the entire fund at a single event. Finally, the IRA Trust can provide for special accumulation trust provisions to be toggled on or off in order to deal with unique situations like:

  • a child or spouse who has special needs and the distribution of funds from trust would jeopardize receipt of government benefits; or
  • a child who has significant creditors, liabilities or is married to an “evil spouse;” or
  • a child who has a marriage that will probably end in divorce.

Conclusion: If you have a retirement fund account that you want to provide to your spouse or other beneficiaries without concern about creditors, predators, marital claims or changed circumstances, consider the establishment of an IRA Trust. Asset protection is an increasing concern for all of those who have worked their entire lifetime to accumulate assets. IRA’s are one of the largest sources of individual wealth.  It is important to consider ways in which you may protect your IRA without sacrificing the tax benefits of the IRA stretch. The IRA Standalone Trust is one of the solutions.

This article is intended only for the purpose of providing general information and does not constitute legal advice. By providing this information we are not establishing an attorney-client relationship and nothing contained in this article should be construed to necessarily be applicable to your unique situation. You should always engage the services of an attorney to determine which, if any, legal solutions are right for you.

Davis Law Group