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.