In the past, it was assumed that if you made an heir a beneficiary of your IRA, then IRA would be safe from your heir's creditors after you passed away. This was because the inherited IRA was treated as retirement savings and not as current income. However, the United States Supreme Court recently ruled to the contrary.
In Clark v. Rameker, the Supreme Court unanimously affirmed a lower court ruling in favor of bankruptcy trustee William J. Rameker. The Rameker decision impacts a sizeable amount segment of the nation's wealth.
Quite clearly, inherited retirement assets are no longer as "bulletproof" from creditors as they were before the decision.
This ruling is sending shockwaves through the estate planning community.
As Insurance News Net points out, in an article titled “Court Decision Has Implications for Estate Planning,” the full implications of this court ruling are not yet clear.
The court's decision leaves open the possibility that a surviving spouse named as the beneficiary of an IRA might still be able to treat it as retirement savings, but the court did not address that issue. For other beneficiaries, however, it is clear that in most states, inherited IRAs will be much easier for creditors to claim in bankruptcy proceedings or otherwise. Such an inheritance will be treated as income, not retirement savings.
If leaving an heir money in a way that is protected from the heir's creditors is an important component of your estate plan, then you need to speak to your estate planning attorney as soon as possible. If you rely on your IRA, as is common, to accomplish your goals, then you will need to make other plans.
There are several possibilities including a retirement trust, which is a trust designed to preserve retirement income. An attorney can help you consider other alternatives as well.
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: Insurance News Net (July 24, 2014) “Court Decision Has Implications for Estate Planning”