Protecting Inherited IRAs from Creditors?
Investment retirement accounts (IRAs) are a popular way of investment in Long Grove. It’s one of the primary ways that the American citizens save money for their retirement period. An IRA allows the tax payers to direct their before tax income – subjected to an upper limit based on their income, to an investment account. This investment account is tax deferred, meaning that you are not taxed on the capital gain or dividend income of this investment. Often when an individual sets up an IRA, his/her spouse and children become the benefiters, whereas the fund would become an inherited IRA.
For nearly a decade, an investment question was lingering in Long Grove. When the inherited IRA becomes non-eligible as a retirement account? In other sense, in the case of a bankruptcy, is the inherited fund protected from the creditors? There had been a lot of debate around the subject for years, and finally the Supreme Court of the United States issued its verdict – which is a big ‘NO’!
Clark vs. Rameker case
The case involved a woman who inherited from her mother’s retirement fund USD 450,000. 9 years later, she filed for bankruptcy for USD 300,000 remaining in the inherited IRA. The creditors wanted her to use the money in the inherited IRA to pay her debts. The previous law related to inherited funds protected up to USD 1.2 million from creditors, in a bankruptcy. However, if the assets were in a Roth IRA or a traditional IRA, they are definitely protected under the exclusion for retirement funds. Clark’s inherited fund did not fit the criteria since it was an inherited fund. The case verdict was given in June 2014, in which the Supreme Court ruled in a 9-0 jury opinion that inherited IRAs are not eligible as ‘retirement accounts’ and not exempted from bankruptcy.
Inherited IRA protection strategies in Long Grove
As a result of the Supreme Court decision, financial advisors and accounting consultants in Long Grove have been researching on the ways to protect inherited IRAs from creditors. As it turns out, there are a few ways in which that can be done:
- If the spouse inherits the IRA, he/she can convert it to his/her own IRA, which is then considered as an investment account and protected from creditors.
- When someone other than the spouse (e.g. children, sibling, parents) inherit the IRA, it can’t be directly mixed in to the benefiter’s account, instead, the fund has to be withdrawn within a limited time period. However, such withdrawal will be subjected to tax considerations. Hence the value of the inherited IRA can be significantly reduced.
- The best way to protect non-spouse inherited IRAs is to use a trust. Here, a 3rd party will hold the assets on behalf of the benefactor. This has two advantages. In addition to protecting the inherited IRA from creditors, it will significantly reduce the tax consequences on the inherited IRA.
Using trust structures to protect the inherited IRAs in Long Grove
There are two most popular trust structures for protecting the inherited IRAs in Long Grove. The
- See through trusts – here the beneficiaries can be identified individually. They are costly to be setup, therefore suitable for large inherited IRAs
- Trusted IRAs – this is a low cost trust option that is suitable for smaller IRAs.
The decision on which trust structure to be used to protect the inherited IRA will depend on the complexity of the situation, and is recommended to take upon the advice of a qualified financial planner or a consultancy firm. Of course, an IRA trust should be implemented carefully. If you do right planning with the help of the best financial advisors in Long Grove, you can make sure that the IRA you leave to a non-spouse benefactor is well protected in a bankruptcy. Call us to learn more about protecting your inherited IRAs from creditors and enjoy your retirement.