By: Barry E. Haimo, Esq.
September 29, 2015
How to Protect IRA Assets for Beneficiaries with Trusts
As an estate planning attorney, I often work with clients who have accrued large amounts in qualified retirement plans like individual retirement accounts, or IRAs. Often, their IRAs have developed into sizeable assets thanks to the tax-deferred growth that is possible for traditional qualified retirement accounts.
In some cases, clients reach retirement only to find that they no longer need the funds in their IRAs to live comfortably. Such individuals are often eager to learn how to best pass their IRA funds to their children.
If you are interested in passing retirement plan assets to your children, it’s important to consider outright beneficiary designations carefully. When you pass your IRA to the next generation, it loses protection from creditor claims. Without statutory protection, an inherited IRA can be torn apart in bankruptcy, divorce, auto accidents, and the like.
To illustrate the vulnerability of inherited IRAs, I’d like to tell you the story of the Hernandez family.
An Inheritance Torn Apart by Creditors
As the youngest child in a family of 13, Luis Hernandez knew nothing of high-end clothes and expensive schools. Although he and his siblings were always loved and well-cared for, Luis often felt self-conscious of his family’s poverty. He was embarrassed by his ratty secondhand T-shirts and sneakers, and hated waiting in line with the other children from poor families for free lunches at school every day. Even as a young child, he vowed that he would be rich one day so his children would have the fanciest clothes and the trendiest toys.
Luis was a fast learner and a hard worker. His talents earned him a full scholarship to study biology at a top school in the East Coast. After graduating from medical school, Luis was offered a position at a top private hospital in Florida.
By the time Luis reached 60, he had definitely met his childhood goal. Not only was he wealthy, but he could shower his daughter, Missy, with whatever her heart desired—the newest smartphone, the most expensive purses, the most stylish clothing, and the sleekest car. Sadly, Luis and his wife divorced. Afterwards, Luis gave Missy her own credit card to treat herself when she was staying with her mom. He also wanted to provide for her later when he was not around. Luis had accumulated a large amount in his IRA that he did not need, and made arrangements to leave the entire account to Missy when he died.
He had managed to provide Missy with a more luxurious childhood than he had, but there was a drawback Luis hadn’t considered. While she was growing up, Missy never had to work hard to have nice things. As a recent college grad in Florida , her entry-level job didn’t support her fine tastes and the lavish lifestyle she was used to. As a result, Missy racked up quite a bit of credit buying the expensive clothes and gadgets to which she had become accustomed.
Missy was torn apart when her father died suddenly of a heart attack at age 65, and touched that he had named her sole beneficiary of his traditional IRA. She transferred the assets into an inherited IRA. What Missy didn’t realize, though, was that this opened the assets up to the claims of all her creditors, since bankruptcy law no longer protects inherited IRAs. Within months, the inherited IRA account was all but dry to satisfy Missy’s creditors.
Key Takeaways from the Hernandez Story
Though unfortunate, there’s an important lesson to be learned from the Hernandez story. Luis could have protected his IRA assets for the benefit of his daughter if he had set up a trust.
When created properly, a trust can protect inherited IRAs from creditors, lawsuits, medical emergencies, and just plain old poor decisions. This can help to ensure that wherever your beneficiary lives or moves, the assets in their inherited IRAs are protected from creditors and other predators.
When it comes to your hard-earned retirement money, you should not take chances. Whether your retirement assets are a large or small part of your estate, you don’t want to risk having a lifetime of savings snatched from your loved ones by creditors or divorcing spouses. Consult with an estate planning attorney, who can help you determine whether a trust might be beneficial in your family’s unique situation. With the guidance of a skilled attorney, you can protect your IRA for the benefit of your children and other loved ones.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
YOU ARE NOT OUR CLIENT UNLESS WE EXECUTE A WRITTEN AGREEMENT TO THAT EFFECT. MOREOVER, THE INFORMATION CONTAINED HEREIN IS INTENDED FOR INFORMATIONAL PURPOSES ONLY. EACH SITUATION IS HIGHLY FACT SPECIFIC AND EXCEPTIONS OFTEN EXIST TO GENERAL RULES. DO NOT RELY ON THIS INFORMATION, AS A CONSULTATION TO UNDERSTAND THE FACTS AND THE CLIENT’S NEEDS AND GOALS IS NECESSARY. ULTIMATELY WE MUST BE RETAINED TO PROVIDE LEGAL ADVICE AND REPRESENTATION. THIS INFORMATION IS PROVIDED AS A COURTESY AND, ACCORDINGLY, DOES NOT CONSTITUTE LEGAL ADVICE.