February 20, 2015
In the second of a two-part series on the estate planningPlanning in advance of disability, incapacity, or death to make sure that key life issues have been addressed while the person is still of sound mind and able to understand and sign key documents such as Power of Attorneys, Power of Attorneys for Health Care, Wills, and Trusts to form a strategy and provide for the administration and disposition of his or her assets upon death or upon incapacity. trends for 2015, we are addressing the increased use of trusts for inherited IRAs.
An Inherited IRA is Different Than a Spousal Roll-Over IRA
When a spouse inherits an IRA from a deceased husband or wife, the surviving spouse can “rollover” the IRA as a Spousal Rollover IRA. To be clear the Spousal Rollover IRA is different than an Inherited IRA. An Inherited IRA is where a non-spouse, such as a child, is named as the beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. of an IRA. When the non-spouse receives an IRA following the death of the IRA owner, this is referred to as an Inherited IRA.
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Historic Use of Trusts for IRA Distributions Following Death Infrequent
The Inherited IRA beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. can usually elect to receive the IRA proceeds as a lump sum or can elect to “stretch” the IRA payments out over a longer time period. Sometimes the Inherited IRA beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. can even elect to stretch these IRA payments over his or her life expectancy, thereby creating funds for his or her retirement.
Historically speaking, the non-spouse beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. could often reduce his or her income taxes paid on the IRA by stretching the Inherited IRA payment over a longer time period. Moreover, most creditors and courts had treated the Inherited IRA as safe from creditors.
In the past, unless there was a valid reason to plan otherwise, most clients preferred to name their adult children directly as beneficiaries on their IRAs. This allowed the children to decide how quickly to access the funds, without the inconvenience of having the IRA flow through a trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries.. We anticipate, based upon our research, conversations with other financial professionals and discussions with clients, that most of our clients willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. still choose to name beneficiaries directly on their IRAs.
However, in light of a recent United States Supreme Court decision, Clark v. Rameker, we willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. be discussing the advantages of naming inherited IRA beneficiaries not directly, but through an “Inherited IRA TrustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries.,” which is also referred to as a “Retirement TrustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries..”
What Exactly Did Clark v. Rameker Hold?
In Clark v. Rameker, a mother named her daughter as the beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. on an IRA. The daughter established an Inherited IRA and chose to take payments from the IRA over time, i.e., not all at once. So, in this case, the daughter had an “Inherited IRA.”
In the past, the courts generally treated an Inherited IRA as safe from one’s creditors. And, it is still true that an IRA that one establishes and funds with his or her own earnings still has certain creditor protection.
However, in Clark v. Rameker, since the daughter did not establish and fund the IRA with her own money, but rather inherited the IRA as a beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary., the Court held that the daughter’s Inherited IRA was not a “retirement fund.” Therefore, the Supreme Court reasoned that the daughter’s Inherited IRA was not protected from creditor claims or bankruptcy.
As this is a United States Supreme Court decision, it is considered the law of the land and other courts willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. follow this reasoning and no longer consider Inherited IRAs as protected from creditors and certainly not protected in federal bankruptcy proceedings.
How Can You Protect Your Inherited IRA from Children’s or Other Beneficiary’s Creditors?
Due to the Clark v. Rameker decision, we willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. recommend — or at a minimum discuss — the advantage of creating an Inherited IRA TrustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. to administer a child’s or other non-spouse beneficiary’s proceeds from an IRA.
In order to protect the Inherited IRA from the beneficiary’s creditors, the Inherited IRA can be paid to a specially drafted “Inherited IRA TrustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries.” that is considered a “see-through” trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. for tax purposes. This type of trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. can provide creditor protection for the non-spouse beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary., stretch out the IRA payments for the beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. to reduce the tax burden, and prevent the beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. from withdrawing the full balance all at once.
If you have significant IRA assets for which you want enhanced creditor protection for your non-spouse beneficiaries, it is important to discuss the advantages and disadvantages of the use of a properly drafted Inherited IRA TrustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries..
Please contact us on 262-658-2181 or via email at info@wokwicz.com if you would like to set up an appointment to discuss if an Inherited IRA TrustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. is appropriate for your situation.
Did you miss the first article in our series on estate planningPlanning in advance of disability, incapacity, or death to make sure that key life issues have been addressed while the person is still of sound mind and able to understand and sign key documents such as Power of Attorneys, Power of Attorneys for Health Care, Wills, and Trusts to form a strategy and provide for the administration and disposition of his or her assets upon death or upon incapacity. trends for 2015? Here is it: Advanced Care Planning