BY MICHAEL J. GREENBERG
As the proportion of workers with pensions continues to decline, more Americans are turning to individual retirement accounts and other qualified retirement assets as their primary source of retirement income.
There are many benefits to saving with an IRA. The most notable advantage is that assets in an IRA grow income-tax-free over an owner”™s lifetime. Only when the money is distributed is it subject to income tax, often at a point in the owner”™s life when she is retired and is in a lower income tax bracket. IRAs and other qualified retirement assets also enjoy creditor protection. If the owner is sued or files for bankruptcy, assets in an IRA are protected.
- Michael Greenberg
If the owner dies with assets still remaining in her IRA, she can leave the IRA to a beneficiary. Depending on whether the beneficiary is a surviving spouse, a child or a trust, different distribution periods, applicable taxes and protections apply.
When an IRA is inherited by an individual, the beneficiary is not allowed to make additional contributions. A lifetime payout schedule is devised based on the beneficiary”™s life expectancy and distributions begin immediately ”” they cannot be delayed until the beneficiary reaches retirement age, like they can be for distributions from a personal IRA. If he chooses, the beneficiary can liquidate the entire account immediately without incurring the typical pre-retirement age penalty. Any distributions of an inherited IRA are taxed based upon the individual beneficiary”™s current tax bracket.
A 2014 Supreme Court case, Clark v. Rameker, held that an “inherited IRA” is not a protected retirement fund under federal law. This means that the valuable creditor protection available to an IRA”™s owner would not apply to his heir if inherited directly as an individual beneficiary. However, an IRA beneficiary trust can maintain some of these benefits and protect the inherited IRA. A properly drafted IRA beneficiary trust, which would be the beneficiary of any qualified retirement accounts, restores creditor protection and maintains the lifetime payout schedule based on the oldest beneficiary of the trust”™s life expectancy. The following benefits and family situations describe the importance of using this type of trust.
1. Provide creditor protection: An inheritance through an IRA beneficiary trust would not be subject to future claims. This would be attractive if the trust”™s beneficiaries include a spendthrift likely to go into bankruptcy or someone in a high-risk occupation, such as a surgeon, who could be sued.
2. Protect assets from children”™s spouses: An inherited IRA held in an IRA beneficiary trust would stay out the hands of a child”™s spouse or soon to be ex-spouse.
3. Qualify for or maintain special needs benefits: A disabled beneficiary could use the trust”™s distributions without jeopardizing potential government benefits. The distribution of the IRA trust could provide spending money for a special needs relative already receiving or applying for Medicaid or other government assistance.
The rules for naming a trust as an IRA beneficiary are very restrictive. An experienced estate planning attorney can help families create an IRA beneficiary trust that complies with federal and state requirements. With an IRA protection trust in place, clients can have peace of mind that their retirement assets will pass on to their loved ones in a way that provides them with creditor protection without sacrificing any potential tax or government benefits.
Michael J. Greenberg is an estate planning, elder law and special needs planning attorney at Keane & Beane PC. You can follow him on Twitter @MJGElderLaw or email him at mgreenberg@kblaw.com.
