The old idea of retirement planning being a “three-legged stool” still holds basically true, but it’s also a little more complicated than it used to be.
Individual retirement accounts, or IRAs, have been a valuable tool for retirement and estate planning for several decades. It has been a great way for people to save money for retirement with little or no taxes paid and grow with interest to provide a nice nest egg to live on later in life or to pass on to beneficiaries.
This comes about following a landmark Supreme Court case that did not get many headlines nationally but has wide ramifications.
No Asset Protection for Inherited IRAs
The Supremes ruled in the 2014 case, Clark v. Rameker, that an inherited IRA is not a “protected account” under federal bankruptcy laws. What this means is if you have an IRA that you inherited from a loved one who passed away and you file for bankruptcy protection, that account is not shielded, which means the account can be used to pay creditors and can be subject to liquidation by a bankruptcy court.
Think about that for a second, and take it to a different angle. Let’s say you leave an IRA to your child who is a bit of a spender. He or she is the type who would ask for money out of the IRA ad use it to buy a car, lots and lots of shoes (there was a big sale!) and to pay back taxes or cover a gambling debt. Was that how you expected the money to be used? Surely the plan was to give the IRA to be used for retirement income and not for paying back creditors or for frivolous spending.
Stand Alone Retirement Plan Trust
But if an inherited IRA is now not protected, what can you do? There are ways to protect that IRA, and they include creating a “see through” trust account that meets certain IRS criteria. In a trust, the inherited IRA not only can be protected from bankruptcy or other creditors, but it also can be protected from those spenders you have as children.
If you have an IRA account that you intend to pass down to the next generation, it is a good idea to visit with an estate-planning attorney who knows the ramifications of the Clark case and how it applies to federal regulations as well as Michigan state law regarding such accounts. One of the best ways to pass IRA’s down to the next generation are with Stand Alone Retirement Plane Trusts.
This is your hard-earned money, and you have a right, a duty, and a responsibility to protect it from various threats so it can be used to its maximum potential. Your retirement account is a part of your legacy, and your legacy should be maintained by the next generation, or you should take control of it in your own way. Either way, proper estate planning now will keep your legacy intact for years to come, regardless of your children, grandchildren or their creditors.