Clark versus Rameker was a case that was heard by the United States Supreme Court and it was a 9 to 0 decision. The decision was handed down in June of 2014. The Supreme Court held that inherited IRAs are not “retirement funds” within the meaning of federal bankruptcy law. The effect of this decision is that inherited IRAs are available to satisfy creditors’ claims if the person inheriting them declares bankruptcy.
Because of this decision, and if you’d like to protect your beneficiary’s inheritance, for the purposes of Estate Planning, we need to take some steps to make sure your beneficiary is protected.
In order to protect your beneficiary, a Standalone Retirement Trust (or SRT) should be created instead of just naming a beneficiary on your IRA. Otherwise, if your beneficiaries have creditors, lawsuit judgments against them, or other predators, the IRA funds can be reached. Naming a beneficiary on your IRA instead of using a Standalone Retirement Trust means the IRA funds will be given “outright” and gifts given outright are more exposed and generally not as preferred as giving a gift in Trust. A Trust provides more protection than a gift given outright will ever provide. Please see my Blog for more on gifts given outright versus gifts given in trust.
Essentially what happens is that the funds will go to a third party Trust and because the Beneficiary did not create the Trust, did not use his or her own money for the Trust, and cannot modify the Trust, certain protections can be utilized to protect the beneficiary. The trust must be carefully drafted in order to properly manage the funds and prevent mandatory payouts that will require emptying the IRA in as little as five years. The Trust must be drafted in such a way as to ensure that the Trust itself qualifies as a “Designated Beneficiary.” The effect of having the Trust as the designated beneficiary means that the Trust will be able to take out what is called “minimum required distributions” (these are minimum dollar amounts that, according to the rules, must be payed out of the IRA) according to the beneficiary’s life expectancy, and not the plan participant’s life expectancy.
Please see my Blog for more discussion of Standalone Retirement Trusts and other aspects of Estate Planning.
Please feel free to give me a call and we can establish your Revocable Living Trust, Standalone Retirement Trust, Irrevocable Life Insurance Trust (ILIT), or other Estate Planning goals today. If you have specific estate planning objectives, I can help create solutions.
See lots of estate planning information on my website at: www.myestate-plan.com
Thanks for reading.
William Daniel Powell
This document is for informational purposes only. Nothing in this is to be considered legal advice. Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship. If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction. I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information.
Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.