MAY 21, 2014

Proper estate planning crucial to protect assets

Morris, Hall & Kinghorn can help determine if your IRA is protected from creditors
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Recently, significant news coverage and hype surrounded the case of Sebilieus v. Hobby Lobby argued before the Supreme Court on Tuesday, March 25, 2014. Surprisingly there was almost no coverage of arguments heard the day before. On Monday March 24, Clark v. Rameker was argued before the justices. The key issue, inherited IRAs.

IRAs can often be one of the larger assets in one’s estate. Typically you would complete a beneficiary form leaving your IRA to your spouse, if you are married, then to your contingent beneficiary. In the Clark case, Ruth Heffron had accumulated $300,000 in her IRA and designated her daughter, Heidi Heffron-Clark, her beneficiary. In 2001, Ruth passed away and subsequently in 2010 the Clarks declared bankruptcy. The Clark’s creditors then went after Clark’s inherited IRA to satisfy their claims. The 7th Circuit agreed with the bankruptcy court’s original ruling that the inherited IRA could be invaded by creditors. The key to the case is whether an inherited IRA is still considered a “retirement account” and thus afforded protection under the bankruptcy code. Of course this begs the question, from what else might an inherited IRA be unprotected? The Court’s ultimate decision could have reverberating effects, as billions of dollars are currently in retirement accounts for the baby boomer generation.

Options are available that make the Court’s decision irrelevant. With proper estate planning, IRAs can be passed to beneficiaries without worrying that what they are leaving could be subject to creditors of the beneficiary. Two main tools when planning with IRAs are the qualified living trust and the IRA trust.

A qualified trust is a specially designed revocable living trust that aligns with IRS section 401(a), to enable the trust to be the beneficiary of an IRA, while enabling the minimum distributions to be based on the beneficiary’s life expectancy. When a qualified trust is combined with a beneficiary trust, the decision in Clark will be moot.

The IRA trust is a standalone trust (i.e., no other assets would be funded to it). It combines the qualified trust and beneficiary trust, with the added benefit of being able to stretch the required minimum distribution based on each beneficiary’s own life expectancy. Thus, younger beneficiaries will be able to grow more of the inherited IRA tax deferred, since younger beneficiaries will not be required to take out as much of the inherited IRA’s balance.

As the Supreme Court deliberates on the Clark case, remember that with smart IRA planning anyone can avoid the issues that befell the Clark family. Proper estate planning for IRAs is imperative to mitigate against the whims of Congress or the interpretations of the Supreme Court. By using the tools of a qualified trust and/or an IRA trust you will help ensure your retirement assets can be used and enjoyed by the people you have identified.

A premier estate planning law firm, Morris, Hall & Kinghorn, can help determine if your IRA is protected. For more information and to schedule a free consultation, call 602-249-1328 or visit Their Cave Creek office is located in Stagecoach Village, 7100 E. Cave Creek Rd., Suite 121.