IRAs and other retirement accounts have grown to become a substantial portion, if not the largest portion, of most of our older client’s estates. Part of the reason for the growth in IRAs has been their preferred treatment under income tax and creditor laws. The tax benefits of IRAs are numerous:
- IRAs grow tax-deferred (with income tax assessed only when distributions are made);
- IRA owners must only begin taking annual required minimum distributions at age 70 ½;
- a surviving spouse may roll over the deceased spouse’s IRA into the survivor’s own IRA;
- and children may stretch an inherited IRA over their life expectancy.
IRAs are also afforded preferred creditor protection under federal and state bankruptcy laws (up to $1.2M for annual contribution IRAs and unlimited for roll overs from qualified plans). Until this year, it was assumed that such creditor protection extended to the children of IRA owners.
In a landmark, unanimous 9-0 decision handed down on June 12, 2014, the United States Supreme Court (often referred to as SCOTUS) held that inherited IRAs are not “retirement funds” within the meaning of federal bankruptcy law, and are thus available to satisfy creditors’ claims. (See Clark, et ux v. Rameker, 573 U.S. (2014)).
In view of the Clark decision, clients must reconsider outright beneficiary designations for their retirement accounts if they want to insure that the funds will remain protected for their children after death. By far the best option for protecting an inherited IRA is to create a stand-alone retirement trust – separate from the IRA owner’s regular revocable trust – for the benefit of all of the intended IRA beneficiaries. Such a trust would preserve the beneficiaries right to stretch distributions; protect inherited IRAs from the beneficiary’s creditors; and ensure that the inherited IRA remains in the family and out of the hands of a beneficiary’s spouse, or soon to be ex-spouse. It also prevents foolish spending of inherited IRAs and holds inherited IRAs for young children and grandchildren without court-supervised guardianship.
Please contact us you would like to protect your IRAs for your heirs.