A very common question that we receive from clients is regarding their IRA accounts, investment accounts, and retirement accounts. Since a large majority of our clients will set up trusts in order to avoid probate and make things simple for their families when they are gone, a lot of our clients have questions on what they should do with these IRA accounts, investment accounts, and retirement accounts. Specifically, it is very easy to name a beneficiary of an IRA account, investment account, and different types of retirement accounts. Therefore, you technically do not need to retitle these accounts into the name of a trust in order to avoid probate, as these are commonly referred to as non-probate assets, as they can easily transfer to the named beneficiary outside of probate.
However, people also need to be aware of recent Supreme Court decisions regarding inherited IRA accounts. Specifically, you can name a beneficiary on an IRA account. Upon your death, the beneficiary has the option in which to withdraw the funds from the IRA that was inherited, or turn the IRA into an inherited IRA account and continue the account as a tax-deferred savings vehicle. However, an important consideration when it comes to estate planning strategies is the result of a recent Supreme Court decision. The United States Supreme Court recently held that inherited IRAs are not entitled to creditor and bankruptcy protection.
What does this mean? For example, if your son inherits an IRA from you at your death and decides to continue the IRA as an inherited IRA for the purposes of creating a tax-deferred savings vehicle, then that inherited IRA account can be seized for the benefit of any future creditors of your son. Specifically, that inherited IRA account does not provide any asset protection.
Let’s say that John and Jane both pass away with a large IRA account in the total amount of $950,000. John and Jane also had a son, James, who had a lot of financial problems and bad luck. James decided to continue the IRA account after he inherited it and continued the account as an inherited IRA account. A few years later, James was involved in a severe automobile accident and a $1 million judgment was obtained against him. Due to the fact that his insurance only covered the first $500,000 of this judgment, James filed for bankruptcy relief to discharge the remaining $500,000 in liability. However, due to the recent Supreme Court decision, James’ $950,000 inherited IRA account would not be considered an exempt asset, and the bankruptcy court would seize that asset for the benefit of James’ creditors.
Therefore, due to these concerns, it may be appropriate to name the trust as the beneficiary of an IRA, investment, or other retirement accounts. If John and Jane had named their trust as the beneficiary of the IRA account, and their trust contained certain asset protection language in the trust, such as staggered distribution to James over the course of his lifetime, then the IRA would be protected from this type of creditor situation.
As such, there may be certain estate planning reasons for naming the trust as the beneficiary of certain IRA, investment, and retirement accounts. However, these important decisions should only be made after a careful and thorough discussion with an experienced and knowledgeable estate planning attorney where you thoroughly discuss your family, life, and financial situation.