The U.S. Supreme Court decision in Clark v. Rameker, 573 U.S._____ (2014) unanimously held that retirement funds that the original plan holder bequeaths to a beneficiary is not considered “retirement funds”. So, if the beneficiary was to file for bankruptcy, the retirement funds will not be considered a federal bankruptcy exemption.
The result? A bankruptcy trustee can access the inherited IRA to include in the bankruptcy estate, subject to creditors’ claims.
So how to protect the beneficiary of an IRA Account? Consider setting up an Standalone Retirement Trust to protect the retirement account from the beneficiary’s potential creditors, but make sure that the trust is considered a “Designated Beneficiary” pursuant to IRC §401(a)(9)(e).
A Standalone Retirement Trust is set up as a third-party trust for the beneficiary and is funded with the retirement assets of the original plan participant at his/her death. This Trust includes asset protection characteristics of a third party irrevocable trust. This is very helpful in providing protection to the beneficiary from future creditors because the beneficiary did not set up the trust; fund it with his/her asset and cannot alter the trust.
To qualify as a “Designated Beneficiary” the Standalone Retirement Trust has to be carefully drafted by an experienced attorney.
If you are concerned with protecting the IRAs and other retirement accounts that your beneficiaries may inherit, contact Ivette M. Santaella of Santaella Legal Group, APC for assistance.