If your assets include an IRA, how is it treated in your estate plan? Taking the approach of simply providing for one or more beneficiaries on the account is a significant mistake — it leaves the assets in the account exposed to substantial risks following inheritance. The only way to address those risks is to discuss your IRA account with an experienced estate planning attorney. Your lawyer works with you to determine the best way to pass the account on to your desired beneficiaries, while protecting the assets to the greatest extent possible.
Located in the East Valley, Peterson Law Offices helps clients with all their estate planning needs, including wills and trusts. If your assets include an IRA or other property that requires special treatment in your estate plan, attorney Shane Peterson is here to help. To schedule a free initial consultation, simply use our online contact form.
Numerous federal laws and rules govern IRAs, including distributions from an IRA account. Some restrictions specifically address inheritance of the account following the death of the original account owner. We discussed a specific new rule about IRA inheritance in our previous blog post, New SECURE Act 10-Year Distribution Rule for Inherited IRAs and 401(k)s May Affect Your Estate Plan. That is not the only issue involving your IRA that is essential to address in your estate plan.
Other potential risks include the possibility of a creditor of the beneficiary reaching the assets for payment of a debt or a non-family member (like a divorcing spouse) making a claim to a share of the assets in the account. The following discussion addresses creditor access to IRA assets after inheritance.
A specific risk to inherited IRA assets is seizure by creditors of the beneficiary. In Arizona, a strong state law prevents creditor claims against an inherited IRA, but many states do not have similar protections. Especially in light of a 2014 decision by the Supreme Court of the United States, if your beneficiary resides in one of the states without a law protecting IRAs from creditors — or your beneficiary moves to such a state at any time after inheriting the account — creditors may be able to claim and even liquidate assets in the account.
The Court’s decision (which was unanimous) in Clark v. Rameker surprised estate planning and financial planning professionals. The holding subjected the substantial IRA assets of a woman who inherited the account from her mother to creditor claims (and liquidation) in a federal bankruptcy case. A federal exemption in bankruptcy law protects the account owner, and the decision does not apply to a spouse of the owner who inherits the account. It does, however, apply to all non-spouse beneficiaries.
As a result of the Supreme Court decision, if you plan to pass along IRA assets to children, grandchildren, or other non-spouse beneficiaries, you should consult with a knowledgeable estate planning attorney about protecting those assets. Using a simple IRA beneficiary designation could put the entire account at risk for creditor claims after the beneficiary inherits the account.
In many situations, the best option for protecting IRA assets after beneficiary inheritance is to put them in a trust. You may be able to add them to a trust you already have in your estate plan, or create a trust specifically for the IRA assets. The terms of the trust depend entirely on your circumstances and your beneficiary’s situation.
A trust should always be drafted by a knowledgeable estate planning attorney. You should never use a form or online service to create a trust.
If your estate plan includes a trust that protects IRA assets after inheritance, the beneficiary designation on the IRA must comply with very specific requirements to be valid. As part of creating and establishing any trust, your attorney assists with ensuring that all assets for inclusion in the trust have proper designations and titles. That includes more than just the beneficiary designation for an IRA. Other assets also must be reviewed to make certain titles and beneficiaries are proper and valid.
At Peterson Law Offices, estate planning is a focus of our practice. Attorney Shane Peterson can answer all your questions about how to protect all your assets, including your IRA, after your beneficiaries inherit the property. Shane takes great pride in providing high-quality services at affordable prices to clients throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. You may schedule your free initial consultation by calling 480-878-5998 or using our online contact form.
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