Designate A Beneficiary
We believe, you should name individuals who are young enough (e.g., children or grandchildren) as the designated beneficiary of your tax-qualified plans and, significantly, the beneficiary should take only those minimum distributions that are required by law.
The younger the beneficiary, the smaller these required minimum distributions. By naming a trust as the beneficiary of your tax-qualified plans, you can ensure that the beneficiary defers the income and that these assets remain protected from creditors or a former son or daughter-in-law.
IRA’s Are Not Protected According To The U.S. Supreme Court
In June of 2014, the U.S. Supreme Court made it clear that for federal bankruptcy purposes, inherited IRAs are not protected from creditors’ claims. The Supreme Court’s opinion in Clark, et ux v. Rameker, 573 U.S. (2014) has deep implications for anyone who looks to leave a significant IRA balance to heirs. The Court held unanimously that retirement funds inherited by a beneficiary are not considered to be “retirement funds” protected by federal bankruptcy exemptions. As a result, the IRA account you leave your heirs is at risk of being lost to your heirs’ creditor claims unless you take steps to protect it.
Naming A Living Trust As The IRA Beneficiary
In order to provide all of the benefits most clients want and avoid mandatory liquidation of the inherited IRA over a period as short as five years, a living trust agreement must be carefully crafted as a “See-Through Trust.” A “See Through Trust” insures that the required minimum distributions can either remain inside the trust (an accumulation trust), or be paid out over the oldest trust beneficiary’s life expectancy (a conduit trust). We generally draft our living trusts to include the conduit trust features. This allows the assets in the IRA to be protected, but the conduit feature requires that the required minimum annual distribution be paid out to the trust beneficiary regardless. This could be problematic if the beneficiary has a drug or alcohol issue or has an outstanding judgment. This problem is solved with an accumulation trust. However, it is virtually impossible to draft a revocable living trust in a way that can provide the “accumulation trust” feature because the IRS requirements to qualify the trust for this feature conflict with other provisions most clients want in their living trust.
Standalone Retirement Trust Is Usually the Best Solution
In many cases, the best option to protect an inherited IRA is to create a Standalone Retirement Trust for the benefit of all of the intended IRA beneficiaries.
Benefits of a Standalone Retirement Trust
If properly drafted, this type of trust offers the following advantages: