Wednesday, June 19, 2024

Consider Your Retirement Accounts

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One of the largest assets that people own these days is in the form of retirement accounts (e.g. IRA, 401(k), 403(b)…). Yet it is one of the most under-planned for assets in an individual’s estate. Retirement accounts are subject to many technical rules and regulations and thus careful consideration and planning is required to achieve the optimum outcome for these highly unique assets.

One of the biggest questions with a retirement account is whether to name a trust as the beneficiary or an individual. The real question is how much protection do you want to pass on to your loved ones?


IRA owners usually have two main objectives when it comes to their IRAs. First, they want to be able to stretch out the income taxation of minimum distributions they and their beneficiaries will be required to take, thereby compounding their family’s wealth tax free inside of the IRA. Second, they want protection of their IRA, once inherited, from their beneficiaries’ creditors, ex-spouse, lawsuits and other third-party attacks. If structured properly within a comprehensive estate plan the retirement account can become one of the most dynamic assets left to a loved one.

The Supreme Court of the United States heard oral arguments on March 24, 2014 in the case of Clark v. Rameker (13-229, 03/24/2014). The key issue is whether a beneficiary’s inherited IRA is subject to the creditor claims in the beneficiary’s bankruptcy. With the baby boomer generation reaching retirement age, these accounts will soon be passing to beneficiaries in the form of inherited IRAs in never before seen numbers. The Court’s decision on whether an inherited IRA has creditor protection will have long reaching effects on the millions of people who have billions of dollars in their IRAs.

Clark addresses whether an inherited IRA is considered a retirement account and thus afforded the protections under the bankruptcy code. On one side, the argument is once a retirement account, always a retirement account. And on the other side, the argument is when an IRA is transferred to the beneficiary, the basic characteristics of an IRA are changed such that they should be considered an inheritance, and subject to the claims of creditors of the beneficiary.

Proper estate planning mitigates the risks of ever-changing laws and interpretations. With proper estate planning, a person’s IRA can be passed to a beneficiary without worrying that the money will be subject to the creditors of that beneficiary.

By naming a properly structured trust as the beneficiary of an IRA we can ensure that each individual beneficiary will be able to stretch out the IRA over their own life expectancy and maximize the income tax stretch-out. This allows the family wealth to continue to grow inside of the IRA, to be passed from generation to generation. By having the trust as the beneficiary of the IRA we can enhance the protections against loss to an ex-spouse in a divorce, or in lawsuits, or from the beneficiary’s own poor spending habits. In addition, by having the trust as the beneficiary, needs-based government assistance for a disabled loved one can be preserved.

When a properly structured trust is named as the beneficiary of an IRA the decision in Clark will be moot. The trust will provide the mechanism necessary to be able to shield the inherited IRA from the reach of trust beneficiary’s creditors.

As the Supreme Court deliberates the Clark decision, remember that with proper retirement account planning anyone could avoid the issues that befell the Clark family. Proper estate planning for IRAs is imperative to mitigate against the whims of Congress or the interpretations of the Supreme Court. The benefits of naming a qualified trust as the beneficiary of your retirement accounts instead of an individual can be summarized in two words: stretch-out and protection. The trust will ensure the maximum stretch-out, thereby maximizing family wealth accumulation, potentially for generations, and will ensure the maximum amount of protection you can offer to your beneficiaries.

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