Let’s look at the issues involved.
In the June, 2014 decision, the Supreme Court found that inherited IRAs, unlike regular IRAs, are not protected in bankruptcy. If inherited IRAs don’t have protection in bankruptcy, then what about creditors? The answer is that inherited IRAs are probably subject to creditor attachment. If you are concerned about asset protection for your beneficiaries, then consider another option: making a trust your IRA’s beneficiary.
First, some important IRA definitions:
Stretch – the number of years over which a beneficiary can withdraw money from the IRA.
Beneficiary – a person who inherits an IRA
Inherited IRA – A traditional or Roth IRA that has been inherited after its owner’s death.
Look-through (see-through) trust– a trust which holds IRA money for its beneficiaries which meets the IRS requirements.
Now for the 3 key points to help you determine who should inherit your IRA.
- If you are married, the best IRA beneficiary is your spouse.
- The Supreme Court case does not apply where a spouse inherits an IRA and then “rolls over” the IRA funds into his/her IRA. Note: no other beneficiary has roll over option.
- Your spouse can use the IRS uniform life expectancy table that applies to IRA owners rather than “single life expectancy” table that applies to inheritors, giving the spouse the best stretch (of course, the spouse can always take out more than the required minimum distribution if the money is needed).
- A spouse can convert a regular IRA to a Roth which can add tremendous value to the IRA (this option is not available to non-spouses).
- Even if you set up a trust, consider making your spouse the first beneficiary and the trust the second beneficiary. Your spouse has nine months to disclaim his/her the IRA money, giving a spouse time to meet with financial advisors to determine the best decision.
- Most beneficiaries are not going to file bankruptcy and are fiscally responsible. If you have no concerns about bankruptcy or creditors, then leaving your IRA money outright is the easiest way for your beneficiaries to receive an inheritance which can be spread out according to each person’s life expectancy.
- If you want your IRA beneficiary to be a trust, have a good reason for making that decision. It’s a cost v. benefit analysis.
- Consider the costs involved in relationship to the value of the IRA.
- Not just any trust can be the beneficiary of an IRA. You must retain the services of a qualified attorney to prepare a see through trust that meets IRS guidelines for these trusts. The initial cost to set up a trust will be at least $5000.00.
- Don’t forget the annual costs which include paying a CPA to prepare the trust’s annual tax return. This cost will be at least $750 and maybe more.
- Who will be the trustee? If the money is held with an institutional Trustee, there will be ongoing fees. If the trust is managed by a relative or friend, make sure the relative has the capability of handling the disbursements and working with the CPA.
- All of the money you pay to set up and maintain the see through trust could instead go directly to your beneficiaries.
- If you have enough money in your IRA to justify the cost of setting up a trust, ask the question “why do I need a trust? What is the benefit?”
- Am I concerned that my beneficiaries will need protection from bankruptcy and creditors?
- Do I want to leave money to minors or grandchildren?
- Do I want to protect my beneficiaries in the event they divorce?
- Even a qualified trust can affect the stretch. In trusts with multiple beneficiaries, the required yearly withdrawal is based on the life expectancy of the oldest. Consider preparing separate trusts so that the beneficiaries can use their own life expectancy stretch.
- If the trust fails to qualify as a see-through trust, then, depending on certain facts, the money will most certainly loose some stretch advantage.
Here’s your action list.
- Review your current beneficiary designation forms.
- Consider whether you need to change your beneficiary.
- If you decide to make your IRA beneficiary a trust, find a qualified attorney to create the trust and make sure that the trust is shown as your primary or secondary IRA beneficiary..
Enjoy the rewards of a well-funded retirement. You’ve earned it!
 For purposes of this article, all retirement accounts will be designated “IRA”.
 Clark et ux v. Rameker, Trustee, et al.
 The spouse and not his/her trust must be the beneficiary in order to receive these benefits.