Inherited IRA'S are Not Creditor Protected

Over the last few years there have been a number of changes about how the IRS treats inherited IRAs and the necessary provisions if you name a trust as the IRA beneficiary. On June 12th of this year the United States Supreme Court unanimously ruled in Clark v. Rameker that inherited IRAs are not afforded the same protections from creditors as regular IRAs.

I am asking all clients to review the beneficiary designation for their IRAs.

Planning Tip:
First, if you are married your spouse should be the primary beneficiary. This gives the greatest flexibility to “stretch out” the distributions from the IRA, have creditor protection, and get maximum tax deferral.

Second, if you are single the question of who to name as beneficiary is a bit more complicated. The answer depends upon the size of the IRA. If the size of each beneficiary’s IRA share is too small to make use of stretching out distributions over their life expectancy, then you should name them directly, but no creditor protection. If asset protection is a concern, then you would name a trust that you create for their benefit (Castle Trust).

Third, In the past the Revocable Trust was named as the beneficiary to take advantage of all of the planning built into the Trust. Experience and a change in IRS rules has eliminated this opportunity. The beneficiary form needs to be updated.

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