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IRA Protection Planning

IRAs and qualified plans create a unique planning challenge in that these assets are subject to income tax when received by the beneficiary.

One way to help reduce the tax impact is to structure these accounts to provide the longest-term payout possible; deferring income tax as long as possible minimizes the overall tax impact and allows the account to grow tax free.  The Stan Miller Law Group has decades of legal expertise when it comes to IRA planning. In many states, including Arkansas, IRA accounts are not protected from creditor claims. This fact makes asset protection of IRA accounts problematic.

The planning associated with IRA accounts generally relates to the naming of beneficiaries of the account. Account holders generally have two objectives:

  • Providing divorce and lawsuit protection to the beneficiary
  • Maximizing the opportunity for “stretch-out” of distributions from the account to the beneficiary

There are three options available to the account holder:

  • Name an individual
  • Name a testamentary trust created in a will or living trust
  • Name a Standalone IRA Trust as beneficiary

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:

  • Protects the inherited IRA from each beneficiary’s creditors
  • Insures that the inherited IRA remains in the family bloodline and out of the hands of a beneficiary’s spouse
  • Allows for experienced investment management and oversight of the IRA assets by a professional trustee
  • Prevents the beneficiary from wasting the inherited IRA
  • Enables proper planning for a special needs beneficiary
  • Permits minor beneficiaries, such as grandchildren, to be immediate beneficiaries of the inherited IRA without the need for a court-supervised guardianship
  • Facilitates generation-skipping transfer tax planning to insure that estate taxes are minimized or even eliminated at each generation

Our Recommendation

We recommend that this trust be a stand-alone Retirement Trust (separate from your revocable living trust and other trusts) to ensure that it accomplishes your objectives while also ensuring the maximum tax deferral and creditor protection permitted under the law. This trust can either pay out the required minimum distribution to the beneficiary or it can accumulate these distributions and pay out trust assets pursuant to the standard you set in advance (e.g., for higher education, etc.).

Don’t overlook the planning for your lifetime of savings in your IRA or retirement plan.  Protect your earnings from the creditors of your child, or from a son-in-law or daughter-in-law, and preserve the income tax deferral for your loved ones. If you want to know more about asset protection planning, give us a call or visit us online.

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