Haimo Law - Wills, Trusts, Probate, Business Planning and Asset Protection

Inherited IRAs Lose Important Ground

Inherited IRAs Lose Important Ground


By: Barry E. Haimo, Esq.
June 25, 2014

Click here to read this post for a basic introduction to IRAs.

As you know, one of the benefits of IRAs is that they are protected from creditors. This is particularly true in Florida, under Section 222.11, Florida Statutes. This asset protection benefit is one of the main attractive components of IRAs. Unfortunately, In June 2014, the Untied States Supreme Court struck down a portion of this asset protection benefit in a recent case. The bottom line is that IRAs will still be asset protected (creditor exempt) to the owner of the account. However, that asset protection benefit will not be enjoyed by the beneficiary of the account in that beneficiary’s bankruptcy proceedings. It is not clear whether the asset protection benefit will be enjoyed by the beneficiary that is not in bankruptcy proceedings.

The remedy, urges Justice Sotomayor, is to designate a discretionary spendthrift trust as the beneficiary, since they do provide asset protection to the beneficiaries of such a trust. While this is true, the cost is a significantly reduced expected lifetime over which annual withdrawals are required to be made. The consequence is this: shortening this period of time results in a much larger annual withdrawal requirement, and as a result, acceleration of the time that it will take to deplete the assets in the account. Therefore, not being able to stretch out the account over a longer period of time results in less wealth preservation and protection. Said differently, since you are withdrawing money faster and in larger amounts from the account,  it seriously inhibits the tax advantages and wealth preservation benefits of stretching out the IRA.

Based on the above, Clients need to dig deep to determine whether asset protection or income tax is prioritized in order to properly plan ahead. If bankruptcy is not likely, then this case is less of an impact on your planning. Then again, few people can anticipate bankruptcy.

Recent Articles about the 2014 United Supreme Court Case: