SCOTUS to rule on Inherited IRA Creditor Protection
The US Supreme Court has accepted a case that may resolve the inconsistent court treatment of inherited IRA creditor protection. Various courts have ruled both in favor and against creditor protection, those denying protection basing their decision on the inherited IRA not being the retirement funds of the beneficiary as they were for the original owner. This decision could result in more inherited IRAs being left to irrevocable trusts rather than outright to a designated beneficiary, as well as other solutions for IRA owners with creditor challenged beneficiaries. Trusts that qualify for look through treatment are allowed to receive inherited IRA RMDs based on the life expectancy of the oldest trust beneficiary, so this would not necessarily destroy the stretch.
NOTE: Wonder where the author got the impression all inherited IRAs are subject to the 5 year rule. This has been a legislative proposal that so far has not seen the light of day.
http://www.reuters.com/article/2013/11/26/us-ira-bankruptcy-idUSBRE9AP18Q20131126
(Article access may be denied, so you may need to search for it directly)
Permalink Submitted by Bruce Steiner on Thu, 2013-11-28 15:16
Even if the Supreme Court holds that inherited IRAs are protected against the beneficiary’s creditors, or in states where inherited IRAs are protected against the beneficiary’s creditors, the protection may be lost to the extent the beneficiary has to take distributions from the inherited IRA. You can avoid this issue by leaving the IRA in trust rather than outright. For more on this, see my article on using trusts for IRAs to protect against the beneficiary’s creditors in the September 2010 issue of Trusts & Estates: http://kkwc.com/library_cat/uf_using_trusts2.pdf, and also my article on trusts as beneficiaries of retirement benefits in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf.
Permalink Submitted by Jose Morales on Fri, 2013-11-29 17:33
Thank you Alan! This is something we will definitely want to keep an eye on.