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Creditors and Your IRA

We continue to remind you that estate planning is about protecting who and what you love, including yourself! When I meet with married couples, they have two equal concerns: taking care of their children (if they have any and they are still minors), and taking care of each other. Today, we are going to talk about taking care of each other and protecting each other with retirement accounts.

Although spouses receive special treatment when inheriting a retirement account such as an IRA (i.e., the ability to roll over the account into a personal retirement account and to stretch the distributions over their lifetime), the retirement account you leave for your spouse can still be seized in a divorce, a lawsuit, or a bankruptcy proceeding.

Three Options Available to Surviving Spouses

When your surviving spouse inherits your IRA, he or she generally has three options:

1. Cash-out the inherited IRA and pay the income tax - WARNING! The cashed-out IRA will not have creditor protection and accelerates taxation. Once your spouse cashes out the account, he or she may use the money in any chosen manner. In addition, if your spouse dies before all the money has been spent, he or she can leave the money to anyone (even a mere acquaintance who was unknown to you).

2. Maintain the IRA as an inherited IRA - WARNING! The inherited IRA will not have creditor protection. However, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a surviving spouse can take the required minimum distributions from this account over his or her lifetime without being held to the ten-year rule, as most other beneficiaries are.

3. Roll over the inherited IRA and treat it as his or her own - WARNING! The spousal rollover may offer some creditor protection but not in all cases. In addition, depending on whom your spouse leaves his or her retirement account to, there is now a larger sum of money to be distributed by the end of the tenth year after his or her death, accelerating additional income taxes for the next beneficiary.

None of these options have creditor protections. Most of my clients find it incomprehensible that a stranger can swoop in and take their hard-earned money after they have died. This is not protecting who and what you love! Fortunately, there is a solution: a properly drafted Standalone Retirement Trust ("SRT").

An SRT is a special type of trust designed to be the beneficiary of your retirement accounts after you die. A properly drafted SRT can do all of the following:

  • Ensure inherited retirement accounts remain in your family and out of the hands of a child’s spouse or ex-spouse

  • Allow for experienced investment management and oversight of the account funds by a professional trustee

  • Prevent the beneficiary from gambling away the inherited retirement account or spending it all on exotic vacations, expensive jewelry, designer shoes, and fast cars

  • Provide proper planning for a special needs beneficiary to avoid disqualifying the beneficiary from receiving needs-based government benefits

  • Allow you to name minor beneficiaries, such as grandchildren, without the need for a court-supervised guardianship

  • Facilitate generation-skipping transfer tax planning to ensure taxes are minimized or even eliminated at each generation of your family

Properly Drafted Standalone Retirement Trusts Can Also Provide Creditor Protection

An SRT can protect your retirement account funds from your beneficiary’s creditors. In fact, we can include trust provisions that specifically protect your spouse in situations such as:

  • second marriages;

  • divorce;

  • lawsuits from car accidents, malpractice, or tenants;

  • business failure; and

  • bankruptcy.

Want To Know More?

The bottom line is that a properly drafted SRT is often your best option for protecting your retirement accounts after you die. Want to know more? Call us today at 301.892.2713 or click here to schedule a complimentary Discovery Session and let us have a conversation. We look forward to working with you to protect who and what you love, including yourself!

"Living with Your Bags Packed!"®


The information in this blog is for educational purposes only and should not be considered legal advice.


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