Protecting Inherited IRAs

Hiring an estate planning lawyer in Ohio or Kentucky is the best way for residents to protect inherited IRAs. If you have inherited or plan on leaving the funds of your IRA to a family member or friend after you pass away, it is important for you to understand that the funds will officially not be considered retirement funds.

This also means that the funds will no longer protected from bankruptcy creditors and lenders.

Why are Inherited IRAs Not Considered Retirement Funds?

The US Supreme Court ruled in 2013 (see Clark v. Rameker) that IRAs that have been inherited are not recognized as retirement funds and thus cannot be protected from bankruptcy creditors.
According to the Supreme Court ruling, inherited IRAs are not the same as participant-owned IRAs for the following reasons:

  1. The beneficiary cannot contribute additional funds to the IRA.
  2. The beneficiary must receive minimum distributions from the account and cannot defer them.
  3. The beneficiary can withdraw all the funds from the account at any time, for any reason and with no penalty whatsoever.

What if I Plan on Leaving it to a Spouse?

When leaving an IRA to a spouse, the law states that the beneficiary can easily roll it over into his or her existing IRA, meaning that the funds can be completely transferred without penalty. These funds will still be considered as retirement funds and treated as such.

If you plan on bequeathing the IRA to any other party that you are not legally married to, the account will not fall into the category of retirement funds.

How Can IRAs Inherited by Non-spouses be Protected?

Even though the US Supreme Court has already ruled on inherited IRAs, you can still take several precautions to protect them. It’s best to consult with an estate planning attorney in order to discuss your available options.

Option #1: Withdrawing and Transferring the Funds

Your first option is to completely clear the funds out of the inherited IRA and deposit them into another existing IRA. While this option will help protect the funds from bankruptcy creditors, the funds you withdraw will be taxed as regular income, significantly reducing the value of the inherited IRA.

Option #2: Set up a Trust

Your second option is to set up a trust. A trust is established by grating a separate legal entity the authority to hold assets for future beneficiaries.

Trusts can protect the funds contained within inherited IRAs from creditors and will also significantly reduce the taxes that normally come with inheriting an IRA. They can also protect the funds from lawsuits, ensure that the intended beneficiaries inherit them and allow minors/people with special needs to access funds that have been properly planned for their inheritance.

How Can I Set up a Trust?

An estate planning attorney can help you establish a proper trust that will help you to transfer funds from an IRA to intended beneficiaries. Contact the estate planning attorneys at Wiggins and Hall Law Group, LLC and start planning your future today.

2017-11-21T11:09:46+00:00February 11th, 2016|Categories: Uncategorized|
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