June 19, 2014. Clark has been the subject of much discussion in estate planning circles the past week. In part because of the subject matter, in part because the decision descends from where it does. The case dealt with the bankruptcy of a pizzeria owner, and at issue was an inherited IRA that the owner had received from the owner’s mother. The IRA was worth $300,000; the owner had debts of $700,000. The question at hand was whether the inherited IRA was protected from creditors. Under the 2005, Bankruptcy Abuse Prevention and Customer Protection Act, retirements funds were afforded significant protection.
The decision from Clark is that inherited IRAs do not fall within the protection of the act, and is an available asset to creditors. The reasoning for distinguishing inherited IRAs from protected IRAs more or less breaks down into the inheritor’s rights in the inherited account versus the rights a person would have to their own retirement funds. Specifically, beneficiaries cannot add money to inherited IRAs like an owner could, the beneficiary required minimum distributions occur regardless of how far away from retirement the beneficiary is, and the beneficiary can take penalty-free total distributions well before an actual IRA account owner could.
This does not mean, though, that we cannot protect these assets. Certain states have carved out protection for inherited IRAs, so Clark will not be applicable in those jurisdictions. Another alternative, and more reliable than depending on the location of the beneficiary, is to name a Trust as a beneficiary of a policy rather than a person. By using the Trust, we can keep the account out of the beneficiary’s estate and away from their creditors.
For more information regarding how to protect your retirement assets, contact the Goosmann Trust Law Counsel at info@goosmannlaw.com or call 712-226-4000.