The United States Supreme Court has determined that inherited IRAs are not protected from bankruptcy creditors. Although this development presents a serious risk for clients, it also presents a planning opportunity for financial advisors.
By far the best option for protecting retirement accounts is to create a Standalone Retirement Trust (SRT) for the benefit of all of the intended beneficiaries. If properly drafted, this type of trust offers the following advantages:
Planning Tip: Additional value is created when provisions are made for the benefit of a spouse. This may be important for many reasons aside from creditor protection, including a second marriage with a blended family or, when coupled with disclaimer planning, for a spouse who eventually needs nursing home care and seeks to qualify for Medicaid. A layered retirement account beneficiary designation which includes a Standalone Retirement Trust and disclaimer planning can offer a great deal of flexibility for clients who want to ensure that their hard-saved retirement funds stay in their family’s hands and out of the hands of creditors and predators.
Of course, even the best laid plans of a future beneficiary “never to touch” the inherited retirement account can go astray, the required minimum distribution of an inherited IRA or retirement plan actually begins as a very small percentage, but just a little bit extra taken from time to time will destroy the accumulation and tax deferral power.
Given the amount of wealth held inside retirement accounts, planners must become adept at helping their clients figure out who or what to name as the beneficiary of these assets. The change in law has amplified the need to become knowledgeable about the pros and cons of all of beneficiary choices for retirement assets.
SRTs are certainly not one-size-fits-all planning and can only be done on an individual, case-by-case basis. We are here to answer your questions about protecting beneficiaries of retirement accounts through Standalone Retirement Trusts, disclaimer planning, and layered beneficiary designations. Feel free to call with questions; we’re always happy to help.