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