Inherited IRA Credit Protection
The beneficiary of both my Traditional and Roth IRA’s is an IRA (Conduit) Trust. As I understand this document the Trust itself pays no tax and the beneficiaries will pay tax each year on the inherited traditional IRA RMD. There will be no other assets in this Trust and a provision prohibits distributions, other than RMD’s, for any other reason, even hardships. In light of yesterdays Supreme Court ruling, will a Trust of this nature be protected from creditors in bankrupcy procedings? Or, stated another way, can (inherited) beneficiaries of a Trust of this nature be considered owners even though they have no access to the corpus.
Permalink Submitted by Bruce Steiner on Fri, 2014-06-13 20:46
The trust should be protected, but the problem with the conduit trust is that it forces out the IRA distributions. As a result, over time, all of the IRA benefits are thrown into the beneficiary’s estate, and are exposed to the beneficiary’s creditors and spouses. That’s why conduit trusts rarely if ever make any sense. For more on this, see my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf.