Inherited IRAs No Longer Protected Unless You Name a Trust as Beneficiary or a Spousal Rollover is Elected
By Herbert R. Fineburg, Shareholder and Managing Principal of the Philadelphia Regional Office of Offit Kurman, P.A., Attorneys-At- Law As a general rule, your IRA is protected from the claims of your creditors even if you file for bankruptcy protection. Consider the case of O.J. Simpson, who was found liable for millions of dollars for the deaths of his former wife and her friend. The estates of his victims could not collect their multimillion dollar judgment from Mr. Simpson’s multimillion dollar IRA, which was a protected asset. However, the U. S. Supreme Court has recently ruled that an inherited IRA left to your beneficiary is not provided any protection from your beneficiary’s creditors. As an alternative, you should note that creditor protection can be attained if you name as your IRA beneficiary a Standalone Retirement Trust for the benefit of your beneficiary, as opposed to naming your beneficiary directly. The assets in a trust which you establish for your heirs can be protected from your heir’s creditors if properly prepared. This includes IRAs and any other assets you transfer to the trust for your heirs during life by gift or upon death. These are called “Asset Protection Trusts”. Generally speaking, the trust assets for the benefit of your beneficiary are protected in most jurisdictions if: (1) you established or form the trust, (2) your assets (and not the beneficiary’s assets) are funding the trust, and (3) the beneficiary cannot modify the trust document. Also, naming an independent trustee who is not the trust beneficiary will further effectuate protection from the beneficiary’s creditors. The trust document must also be carefully drafted so that the trust qualifies as a “Designated Beneficiary” for income tax reporting purposes. If the trust is properly prepared, the trust can take the minimum distribution from the inherited IRA, thereby deferring the recognition of taxable income from IRA distributions. If the trust document is not properly prepared, the trust will need to withdraw the entire IRA within five (5) years of the death of the original owner of the IRA – the so-called plan participant. In the case of Clark v Rameker, Justice Sonia Sotomayor writing for the Supreme Court, found that Heidi Heffron-Clark, who inherited an IRA from her mother and later filed for bankruptcy protection, could not shield her inherited IRA from her creditors. In contrast to an inherited IRA, Justice Sotomayor noted that the creditor protection rules for the original IRA owner are designed to ensure that such owner has IRA assets upon retirement. That protection does not transfer to the heirs of the owner. The inherited IRA rules may also apply to a spouse who inherits an IRA from a deceased spouse. The exception is that a surviving spouse has the unique option of rolling the deceased spouse’s IRA assets into his or her own IRA as if he or she was the original owner of the IRA with full creditor protection. A spouse, who does not rollover, will have an inherited IRA. In contrast to other IRA beneficiaries, the surviving spouse whose spouse died before 70 ½, will not need to with draw the inherited IRA within five years of the owner’s death, but can wait until his or her deceased spouse owner would have turned 70 ½. See an experienced estate planner to make sure your trust is correctly structured so that your heirs, and not their creditors, receive your IRA as well as the other assets in your estate.
About Herb Fineburg
Mr. Fineburg concentrates his practice in the areas of Business Law and Transactions, Mergers and Acquisitions, Estate planning, Estates and Trusts, and Tax Consulting. He is recognized as one of Philadelphia’s most respected business lawyers whose substantial knowledge of tax law provides clients with strategic and cost-saving benefits in connection with commercial transactions, taxation and wills, trusts and estates matters. Known for his ability to resolve complicated matters effectively, Mr. Fineburg has assisted businesses and individuals with the organization of their finances, business and real estate affairs, and the structure of their assets (i.e., in LLCs, partnerships, corporations, trusts or joint ownership). He has substantial expertise in the preparation of buy-sell agreements for co-owners who are family members or are unrelated business partners. In addition, to working on bank financings, business contracts and employment matters for his business clients, Mr. Fineburg also provides advice on business acquisitions and sales, and the resolution of shareholder and partner disputes and buy-outs.
Please contact Mr. Fineburg with questions or request for further information at firstname.lastname@example.org or at 267.338.1376.