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Walser Law Firm

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Avoid Unnecessary Family Disputes with a Letter of Instruction

Inherited IRA Protection
Are your retirement assets protected from bankruptcy creditors?
Individual Retirement Accounts (IRAs) are protected from creditors to varying degrees under state and federal bankruptcy laws.  A recent U.S. Supreme Court case (Clark v. Rameker, June 12, 2014) held that “inherited IRA’s are not protected in bankruptcy.  The court ruled that once a traditional or contributory IRA is transferred to a non-spouse beneficiary, becoming an inherited IRA, it no longer contains funds that are specifically set aside and saved for retirement purposes.  As a result, inherited IRAs cannot be considered “retirement funds” and therefore are not protected from inheritor’s current or future creditors.  
Good News: Spouses continue to be protected.
When a spouse is the named beneficiary, and the participant spouse dies, the IRA funds will still be treated as an “inherited IRA” and will have creditor protection in the event of bankruptcy.
Bad News: Any non-spousal beneficiaries, such as children or grandchildren, have no creditor protection.
Thankfully Florida is one of eight states that have taken action to provide relief to debtors who file for bankruptcy and to protect Inherited IRA, by enacting (FLA. Stat. Ann. 222.21).  Despite the decision in Clark vs. Rameker, debtors can elect to use state exemptions to protect assets from creditors where their state has invoked such relief.  This results in effectively circumventing the application of Clark. 
From a planning perspective, relying on a particular state’s exemption is unwise.  Reason being, the state exemption laws only apply if a beneficiary resides in that state and most states have long and strict residency requirements. Combine this with the mobility of today’s society; a beneficiary may move to a state where no exemption is afforded. 
How to Protect your Beneficiaries:
It is often a prudent planning decision for a retirement plan owner to designate a trust as the beneficiary on their retirement plan.  A trust is a popular designation because it gives the plan owner some degree of control over how the assets are distributed after he or she is deceased.  However, while a trust is an effective planning tool, its effectiveness must be balanced with achieving the goals of effective wealth transfer and maximizing the stretch for beneficiaries.  A trust, when properly drafted, can continue to protect IRA assets in the case of not only bankruptcy but a number of situations such as divorce, disability or the beneficiary being a minor.  There are a number of technicalities in creating a trust specifically to maintain assets from a retirement plan, and an experienced attorney should be consulted to navigate those options and advise you appropriately. 
The Walser Law Firm has a depth of expertise with integrating effective IRA protection planning within your overall estate plan.
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