| In a recent case, a person died and named beneficiaries for his IRA. In the old days, an inherited IRA was protected from the creditors of the beneficiary. However, in this case, (Clark v. Rameker) the Supreme Court said, “No asset protection exists for an inherited IRA anymore.” Thusly, IRA trusts are very beneficial since they do provide asset protection for your beneficiaries. Bottom line, after the recent Supreme Court ruling, the inherited IRA is not safe unless you name an IRA Trust as the designated beneficiary. What is an IRA Trust Versus an IRA? What Makes it Different, and Where it Does Have Asset Protection?The difference is that when you open up an IRA, you designate beneficiaries. An IRA doesn’t go through probate; it’s not distributed through your will. Instead, it’s simply a contractual obligation. The custodian of the IRA, whether it’s a company like Vanguard or Fidelity, is going to pay the named designated beneficiary when you open up that IRA account. Therefore, in this case, no probate is involved, and no trust is involved. The beneficiary is simply entitled to the money. The problem in this case occurs if the beneficiary simply takes the money out as a lump sum. This is money that’s never been taxed in the lifetime of the IRA owner. Therefore, if I leave my IRA to my son, and he removes all the money at once, this money is considered his income. Therefore, next April 15, he’s going to receive a big tax bill. Furthermore, the beneficiary is usually unaware of the opportunity to stretch out distributions. The tax benefit of taking stretched-out distributions is amazing. Let’s say, for example, somebody inherits an IRA. He is 45 years old and receives a $200,000 IRA. When you own an IRA, you must take the money out when you’re 70. When you inherit an IRA, however, it is not the same. You must begin removing the money right away. However, you don’t have to take it all at once. This is the great part. You can stretch out the money over your entire life expectancy. A 45-year old has a remaining life expectancy of 55 years. This 45-year-old receives $200,000 and removes the minimum distribution based on his life expectancy, thus allowing the IRA to grow 5 or 6 percent per year. In thirty years, when the person is 75, he will have removed 400,000 from the original $200,000 IRA. $300,000 will still remain in the IRA. Therefore, stretching it out is much, much smarter. Can People Take Inherited IRA Money and Invest it in Another IRA? Is that Allowed?No! Unfortunately, you cannot roll the money over into your own IRA unless you’re married to the person who owns it. In this case, you’ll utilize something called spousal rollover. For example, if my wife is my primary beneficiary, and I die, she’ll receive my IRA. It becomes her IRA. However, this interaction is only available for the spouses, not for the children or anyone else. Remember that children and grandchildren don’t receive the tax-free benefits of a spousal roll-over. Rather, they must begin removing the money immediately. When we explain the precise workings of an IRA to clients, they understand how they must ensure the stretch-out of their IRA for their loved ones. Can People With Regular, Unprotected IRAs and 401ks Covert Them for Protection?Yes, you can convert them. Of course, you must sort of balance this out because less investment opportunities are available under the 401Ks. However, it simply depends on the circumstances. Can Your Children Still Receive Asset Protection from their Creditors?Yes! The idea behind the IRA trust is that instead of simply designating your son, your daughter, or your grandchildren as the beneficiaries and simply allowing them to remove the money as a lump sum, thus blowing the tax benefits, you designate a special IRA trust. This special trust has been blessed by the IRS to create stretch-out distributions based on the beneficiary’s life expectancy. This way, you ensure the stretch-out, and you minimize the taxes. Because it’s an irrevocable trust, it’s creditor-proof, even in light of that recent Supreme Court ruling. It’s not simply an inherited IRA heading to a beneficiary. Rather, it’s entering into an irrevocable trust with many spendthrift provisions to protect the beneficiaries from divorces, lawsuits, tax problems, business failures, and their inability to handle money well. When I discuss this with clients who have an IRA that’s more than $200,000 or $300,000 they comprehend the benefit of it. It’s simply a terrific vehicle. For more information on Asset Protection of IRA Trusts, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (949) 660-0007 today. |