Inherited IRAs and Creditors, Divorce
Can I get some comments concerning whether or not Beneficiary IRA account balances are generally within the reach of creditors and divorcing spouses? We have an individual that is seriously concerned about leaving those assets, at their death, to a child with creditor issues and the potential for divorce. We’ve also been advised that the use of a trust as a ‘middleman’ beneficiary’ might limit access due to the spendthrift provisions within the trust document.
For some reason, I believe that IRA accounts may differ from Beneficiary IRA accounts in this regard. True?
Thanks!
PR
Permalink Submitted by Alan Spross on Sun, 2010-12-12 04:47
Yes, you are correct that inherited IRAs generally do not receive the creditor protection accorded owned IRAs, but this varies by state. Most recent decisions erode the creditor protection for inherited IRAs, but there are some (eg Nessa) that are favorable. Therefore, there is a need for researching the legal situation in your particular state. Leaving the IRA to an appropriate trust can provide creditor protection in the case of divorce or beneficiaries who cannot handle money. Here is a link to some recent cases, and if you click on the tag at the end some additional articles are shown:
http://www.ncestateplanningblog.com/2007/07/articles/iras/inherited-ira-…
Permalink Submitted by Bruce Steiner on Sun, 2010-12-12 20:18
It varies from state to state. I wrote an article on this for the September 2010 issue of Trusts & Estates: http://www.kkwc.com/library_cat/uf_using_trusts2.pdf .
I agree with Alan that if creditor protection (or estate taxes in the beneficiary’s estate) is a concern, you can leave the IRA (as you would leave other assets) to the beneficiary in trust rather than outright. I wrote an article on this for the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf . The trust can have whatever terms you want, provided that none of the accumulated IRA distributions can ever go to anyone older than the beneficiary whose life expectancy you want to use to calculate the required distributions. We generally prefer to give the trustees discretion to distribute as much or as little as they deem appropriate. Also, if desired, the beneficiary can have effective control over the trust, without exposing it to creditors, spouses, or estate tax in the beneficiary’s estate.
Permalink Submitted by Sean Vaughn on Mon, 2010-12-13 19:32
Bruce –
Thank you for those articles. I just subscribed to Trusts and Estates – looks like a few months too late.
If our client has two daughters that differ in ages of roughly 10 years, but also have two children themselves, would it be advisable to 1.) create two trusts as beneficiaries, one for each daughter, and 2.) do this in order to preserve the differences in RMD calculations for subsequent distributions?
I’m thinking that this would be a good strategy, since the RMD for one daughter could be substantially different than the other. Additionally, an accumulation trust, if there were in fact two, could be managed for the different families.
I know that the PLR exists concerning an individual that did, in fact, create different trusts as beneficiaries for RMD purposes, but I was curious to know if this is now common practice among the legal community for beneficiary purposes since PLRs are not considered to be law.
Thanks again for your contribution to this forum!
PR
Permalink Submitted by Bruce Steiner on Mon, 2010-12-13 20:41
Someone with 2 children would probably create a separate trust for each child so that the assets could be invested differently, and so distributions could be made to each one out of her own trust.
To be able to use the younger child’s life expectancy for her trust, you’ll have to exclude the older child as a potential beneficiary (if the younger child and all of her issue die and the younger child does not exercise her power of appointment). Often it’s preferable to keep the older child as a possible beneficiary of the younger child’s trust, but in this case, since they’re 10 years apart, and each one has 2 children of her own, the client may prefer to exclude the older child as a potential beneficiary of the younger child’s trust.
I’m on the editorial advisory board of Trusts & Estates and write for it on a regular basis, so you’ll continue to see my stuff there.