On June 16, 2014 the United States Supreme Court says “NO”; Inherited IRA’s are no longer protected from creditors or BANKRUPTCY.
The Supreme Court explained that Inherited IRAs are not really retirement accounts. Unlike traditional Retirement Accounts, beneficiaries are not allowed to contribute additional funds into these accounts, they cannot be rolled into their own traditional IRA and they must start withdrawing money from these accounts without tax penalties following the death of the original owner.
Mom and Dad die after naming their children as beneficiaries of their various Retirement Saving Accounts (401k, IRA, TSP etc…) These accounts will pass directly to their children free from probate after being re-classified as Inherited IRAs. As such, the children will have unlimited ownership and control over these accounts.
But now that it’s your child’s account, what can you do to protect it from their problems? To answer this I think it is best to explain what an Inherited IRA actually is.
Our Federal Government encourages people to contribute to their Qualified Retirement Plans or IRAs to help them prepare for retirement. Contributions are tax deductible but come with serious withdrawal limitations prior to turning 59 1/2. . The Government also protects these retirement accounts from creditors and in Bankruptcy if you are unfortunate to fall on hard financial times.
After you pass away, your spouse can roll your retirement accounts into their own IRA. The same creditor protections and tax limitations will apply. However, if you name your children, or others as beneficiaries, these accounts are no longer considered Qualified Retirement Accounts, they are re– classified as Inherited IRAs. As such, your beneficiaries have the immediate ability to withdraw these funds or at the very least are required to immediately start taking their required minimum distributions they would have to pay the income tax but there is no income tax penalty for doing so prior to 59 1/2. Your spouse also has the ability to convert it into an Inherited IRA as well.
Now that your beneficiaries have their Inherited IRA’s established, what happens if they have student loans, large medical or credit card debt, are upside down on their mortgages and being sued or have to file Bankruptcy, will these Inherited IRAs have the same protection? The answer is, NO! The Inherited IRA’s are not protected if your beneficiary gets sued or has to file for bankruptcy.
Simasko Law office has the solution; it is called the “Genesis IRA Trust”. It allows you to name the trust as your beneficiary of your Qualified Retirement Accounts and the principal would be protected for your beneficiaries’.
The Genesis IRA Trust is used in “addition” to the revocable family trust that you may already have. As a stand– alone trust, it provides many additional benefit in addition to creditor protections such as: Divorce, Income, or Passing down to grandchildren.
As your attorney, it is our duty to seek out the best strategies available to endure that you and your loved ones are protected on a legal basis.
Patrick Simasko