SCOTUS Decision Makes Inherited IRAs Vulnerable to Creditors’ Claims

A recent decision handed down by the Supreme Court of the United States (SCOTUS) has made inherited IRAs vulnerable to the claims of creditors.  In Clark v. Rameker, all nine justices unanimously agreed that in the context of a bankruptcy case, an IRA inherited by a beneficiary who files for bankruptcy does not consist of the beneficiary’s own “retirement funds” and is therefore available to pay the creditors of the beneficiary.  This decision puts to rest conflicting opinions that have been rendered over the past few years at the federal circuit court level, but it does not affect state laws or state court decisions that have resulted in inherited IRAs being protected from creditors (this includes laws or decisions in Alaska, Arizona, Florida, Idaho, Missouri, North Carolina, Ohio and Texas).

With all of this as a backdrop, what can you do now to insure that after you die your IRAs and other retirement accounts will remain in the hands of your intended beneficiaries and away from their creditors?  The only way you can protect your hard-saved retirement funds is to establish a special type of revocable trust to be the beneficiary of the funds after you die.  This type of trust is referred to by several different names, including an IRA Trust, IRA Living Trust, IRA Inheritor’s Trust, IRA Inheritance Trust, IRA Stretch Trust, or a Standalone Retirement Trust.  But regardless of what it is called, when properly drafted, this type of trust will not only protect your retirement accounts for the benefit of your family, but it will also protect your beneficiaries from their own bad decisions, inexperience with investing, excessive spending habits, and overreaching spouses.

If you’re not sure if an IRA Trust is right for you, then sit down with your estate planning attorney to learn about the pros and cons of creating one to be the beneficiary of your retirement accounts after you die.

Photo: United States Supreme Court Building as seen from across First Street, NE.

Want to Reduce Your Estate Tax Bill Like the Clintons? Try a QPRT

Last week the estate planning world was all abuzz about an article that appeared on Bloomberg called Wealthy Clintons Use Trusts to Limit Estate Tax They Back.  The article, written by Richard Rubin, tax policy reporter for Bloomberg News, focuses on the Executive Branch Personnel Public Financial Disclosure Report that Hillary Clinton was required to file when she left office as Secretary of State.

Mr. Rubin points out that back when Mrs. Clinton ran for president in 2008, she, like her opponent for the Democratic presidential nomination, one Barack Obama, supported a $3.5 million federal estate tax exemption coupled with a 45% estate tax rate.  In addition, Mrs. Clinton has been quoted as saying that without an estate tax, the U.S. could become “dominated by inherited wealth.”  And yet her Financial Disclosure Report, signed by Mrs. Clinton on April 8, 2013, reveals that in December 2010 Hillary and Bill Clinton each created a “Residence Trust” to hold and own their Chappaqua, New York home.  In legalese this type of trust is referred to as a “Qualified Personal Residence Trust,” or QPRT for short, and is an advanced estate planning technique commonly used by wealthy parents or grandparents who want to keep their prized family homestead or a beloved vacation home on the lake, on the beach, or in the mountains in the family at a reduced gift tax value.

In basic terms a QPRT is used to move the appreciation of a residence outside of a parent’s or grandparent’s estate.  In other words, at the time the residence is transferred into the QPRT, its value is set for gift tax purposes and then as the residence appreciates in value in future years, this increase in value won’t get added back into the value of the parent’s or grandparent’s taxable estate.  And voilà, just like that, the parent’s or grandparent’s estate tax bill suddenly shrinks.

Of course, this is a very simplistic view of a QPRT and its actual success as an estate tax reduction technique will depend on many factors.  For the Clintons, the success of their QPRTs will depend on how long they live beyond the terms of years they’ve chosen for their QPRTs to run, how much their Chappaqua home increases in value during that time, how long Chelsea Clinton and her children (I’m assuming that the Clintons chose their only child and her descendants as the ultimate beneficiaries of their QPRTs, which I think is a safe assumption) hold on to the residence before they sell it, and what the income tax and estate and gift tax laws in New York and at the federal level look like in the future.

If you have a prized family homestead or a beloved vacation home on the lake, at the beach, or in the mountains that you want to keep in your family like the Clintons, then talk to your estate planning attorney to see if a QPRT is right for you.

Photo: Hillary Clinton takes the oath of office as Secretary of State/United States Department of State

Recent Wealth Transfer Developments – Prof. Pennell’s Views

Last week I attended a continuing legal education conference and one of the topics covered by Prof. Jeffrey N. Pennell of Emory University School of Law was “Recent Wealth Transfer Developments.”  If you’re not familiar with Prof. Pennell, suffice it to say that within the estate planning world, when Prof. Pennell speaks, people really listen.  Below is a summary of Prof. Pennell’s comments that stood out to me.

  • Hot topics in wealth transfer have shifted in recent years.  While valuation questions remain prevalent, not much else is going on.  (According to Prof. Pennell, apparently we’ve paid Congress to stay home and that’s exactly what they’ve done.)  However, interest in income tax planning, transferee liability, and state court developments is on the rise.  He cautioned that practitioners need to be aware of changes that are happening in other states since many clients own property in multiple states.
  • Prof. Pennell commented on the “Greenbook Proposals” that are issued each year in conjunction with the president’s budget.  Prof. Pennell thinks that the proposed changes to grantor retained annuity trusts will eventually be implemented.  He pointed out that the “sleeper aspect” of the proposed changes is that zero-gift GRATs will go away which will make the remainder a future interest subject to gift tax.
  • With regard to the Greenbook proposal on intentionally defective grantor trusts, Prof. Pennell doesn’t believe this will go forward.  However, he said that the proposal shows that “Treasury is angry” and really “hates” transactions which rely on its own mortality tables for a private annuity or self cancelling installment note, and really “hates” the kind of transactions in which an appreciating asset is transferred into an IDGT in exchange for a private annuity or SCIN.
  • Prof. Pennell has been surprised by how quickly state courts have reacted to the U.S. Supreme Court’s decision in the Windsor case.  He predicts that eventually no state will hold discrimination based on same sex marriage constitutional.
  • Also at the state level, courts have been successfully challenging surviving spouses who reject wealth in order to remain on Medicaid.  In addition, financial elder abuse through Powers of Attorney is on the rise and some states have passed laws that disinherit a person who uses a Power of Attorney to commit financial elder abuse.
  • Finally, Prof. Pennell said that with regard to asset protection, there hasn’t been a single case yet which says it works.

Who Will Be the Guardian of Actor Paul Walker’s Daughter?

Where Meadow Rain Walker, the 15-year-old daughter of actor Paul Walker, will live has finally been decided.  Nearly six months after the Fast and Furious star died in a fiery car crash, the guardianship court case has been dismissed after Meadow’s court-appointed attorney told the judge overseeing the matter that Meadow has “a lot of layers of support.”

All of the court room drama began because in his Last Will and Testament, Paul Walker named his mother, Cheryl Walker, and not Meadow’s biological mother, Rebecca Soteros, as guardian for Meadow.  Shortly after the actor’s death, Cheryl Walker tried to fulfill her son’s final wishes by petitioning to be appointed as Meadow’s guardian.  The petition claimed that Rebecca Soteros has a drinking problem and is therefore not fit to take care of Meadow.  But apparently Ms. Soteros recently finished a stint in rehab and so in the end Cheryl Walker dismissed her guardianship petition which means that Meadow will live her mother and a nanny who has already been caring for the teenager for several years.

What’s the #1 Biggest Result You’ll Get From Planning Your Estate?

Let’s face it, estate planning isn’t something that you’ll do just for the fun of it, instead it’s serious business that requires a serious investment of time and money. But after investing the time and money to get it done (and done right by an experienced estate planning attorney, not by some cheapass, do-it-yourself, home-made method), it will give you this #1 biggest result.

So what is it? Three simple words – Peace of Mind.

Yes, it’s really that simple, nothing more, nothing less. And while peace of mind really isn’t easy to come by in this fast-moving and ever-changing world, checking estate planning off of your “to do” list will certainly give you some peace of mind – in fact, a lot of it.