A recent U.S. Supreme Court decision, Clark v. Rameker, will have big implications for clients. In the Clark case, the Supreme Court held that, while a person’s own IRA can be protected in the case of bankruptcy, the court has determined that an inherited IRA cannot, at least when it is inherited by someone other than a spouse. While that is big news for those who have already inherited an IRA, it is a call to action for those planning to leave one behind. Being aware of the consequences of the Court’s decision can drastically change the approach to planning in order to protect heirs from this new development.
It is common for estate planning lawyers to see clients who have much of their wealth in the form of an IRA or 401(k). During the planning process, they determine how that money should be used after their death. It often makes up a large part of the estate they intend to leave behind. Until recently, this was commonly done by naming individuals as beneficiaries or by simply making the IRA beneficiary a Revocable Living Trust. Now, however, depending on the terms of the Trust, that money can be taken away if the heir declares bankruptcy.
Protecting Wealth In An IRA For Beneficiaries
In order to protect money in an inherited retirement account, for many clients, we are now recommending that clients consider setting up a Retirement Protection Trust. This type of trust can protect against other threats, too. Basically, it makes the money inaccessible to any future creditors of the trust’s beneficiary because the trust was not established or funded by the beneficiary. By naming an independent trustee rather than having the beneficiary play this role, there are even more protections in place. We can also assist in choosing an appropriate trustee.
There are some fairly stringent guidelines that need to be followed to make sure a Retirement Protection Trust works as intended. We will need to make sure these regulations are adhered to so that the trust can qualify. When done properly, the trust’s distributions can be made similarly to how they would have from the IRA.
Whether you are just beginning the planning process or you have already created an estate plan, this big decision by the US Supreme Court can affect you and those you leave behind. Make sure to contact our firm to ensure that your IRA is protected for the next generation.
- Estate Planning and Charitable Giving — Key Points - March 29, 2020
- Over-Funding Your Retirement Plan: A Potential Estate Planning Problem - March 27, 2020
- Best Places to Retire: State Taxation - March 25, 2020