Asset Protection of IRAs and Retirement Accounts

The US Supreme Court has recently and unanimously ruled in the case of Clark, et ux v. Rameker, Trustee, et al, that funds held in inherited IRAs are NOT “retirement funds” within the meaning of §522(b)(3)(C) and therefore are not protected in bankruptcy.  It is clear that IRAs are exempted but, before this decision, whether an inherited IRA was subject to the same protection had varying precedent.

An IRA that was generated from the work efforts of the individual, such as a 401k, IRA, a rollover IRA from a 401k, and accounts of that character have historically been protected from creditors of the owner of the account.  The standard for protection has also always been how the accounts would fare in a bankruptcy proceeding.

It is projected that in the next 10 years there will be trillions of dollars passing to heirs, of which a substantial amount will be in the form of IRAs that are inherited by the heirs.  The Clark decision now encourages clients to look at alternatives in how these qualified plans are transferred to the heirs.  A conduit or accumulation trust in a clients’ traditional revocable living trust may no longer be a good approach if the clients are concerned about the protection of the IRA assets.

The decision in Clark bring to the forefront other planning devices such as a qualified trust being named as beneficiary of an IRA, or the use of testamentary charitable trusts, which generally pay out the heirs over a 20 year period more than the value of the qualified plan being inherited.

 

Please feel free to contact me if you would like additional information on alternative approaches.

This entry was posted on Thursday, July 3rd, 2014 at 3:23 pm and is filed under Estate Planning.