This headline caught your attention, yes? Relax. A bit.
Unfortunately, as recent unanimous Supreme Court decision in June says that creditor protection does not extend to your children when they inherit your IRA.
So, how is that?
Well, the Court found that an "inherited IRA" is no longer a retirement account, as evidenced by the fact that a beneficiary can withdraw from the account without limitation or penalty. Consequently, according to the Court, the IRA is not protected from creditors under federal bankruptcy law.
Estate planning attorney and other financial advisors are encouraging their clients to protect IRA assets for beneficiaries should those heirs declare bankruptcy.
This was the subject of a recent Wall Street Journal article titled "Court Ruling Sparks Rush to Shield IRAs." The article noted that many advisers are urging clients to create a trust as the IRA’s beneficiary, or to set up an IRA as a trust account while the owner is still alive.
Either way, the original owner retains access to the money before he or she dies. Depending on the type and terms, trusts can shield assets (including an IRA) against creditors and preserve the "stretch" on those funds over the lifetimes of the individual beneficiaries.
According to the original article, the challenge is identifying and employing the right kind of trust. As you might imagine, this is easier said than done.
These issues are complex.
The type of trust you should use will depend on a number of factors, to include the number of beneficiaries, the tax goals, and asset-protection goals.
But what if I already own an inherited IRA?
Based on where you live and how long you have been living there, the assets might yet fall under state bankruptcy protection. For example, Alaska, Arizona, Florida, Missouri, North Carolina, Ohio, South Carolina, and Texas all have laws extending give this protection in some circumstances, even after the Supreme Court's decision.
One more thing: the Supreme Court did not directly address surviving spouses who inherit an IRA. Their status is far from certain, but some experts suggest that they roll over an inherited IRA into one under their own name.
Contact your estate planning attorney and discuss the new Supreme Court decision, especially as it concerns your IRA and loved ones.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: Wall Street Journal (Oct. 12, 2014) "Court Ruling Sparks Rush to Shield IRAs"