The US Supreme Court in Clark v. Rameker (June, 2014) solidified that children or other “non-spouse” individuals should not be named the beneficiary of an IRA, if asset protection is a goal. The court, in a 9-0 decision, declared that an inherited IRA is not a “retirement account” and allowed the bankruptcy trustee to invade an IRA inherited by the debtor (child), to pay her creditors. The decision set the new precedent that inherited IRAs are not protected from the creditors and predators of its owners. Click here for a decision tree on naming your IRA beneficiary options and the asset protection impact.
The Supreme Court decision left intact the ability to name a spouse as beneficiary, since a spouse has the right to create a new IRA or combine the IRA of the deceased spouse with his or her existing IRA. While this method may appear to protect a spouse’s inherited IRA, it is not a viable approach when an individual dies without a spouse, or if the surviving spouse is in need of long-term care. There is however, a foolproof way to protect IRAs after death, regardless of circumstance. Name a trust as beneficiary!
Most legal and financial professionals will grimace at the idea of a trust being named beneficiary of an IRA. They believe that doing so makes the entire IRA taxable at death or will result in the loss of the “stretch” and force it to be paid out within five years. This is true only if the trust named beneficiary is not a “qualified” pass thru beneficiary, but if it is, it enjoys all the benefits the trust beneficiaries would receive as direct beneficiaries.
For a trust to be a “qualified” pass thru beneficiary of an IRA it must meet four criteria:
1) it must be valid under state law;
2) it must have identifiable “human” beneficiaries;
3) it must be irrevocable after death; and
4) a copy of the plan document must be provided to the plan administrator.
While there are some complexities in complying with these rules, once understood and properly applied, naming a trust as the beneficiary is the only way to ensure asset protection of inherited IRAs in the post Clark v. Rameker world. When properly drafted, a Revocable Living Trust, an Irrevocable Pure Grantor Trust (iPug™), a grantor trust or non-grantor trust can be utilized. The drafter of the trust must distinguish the “inside” designation strategy from the “outside” designation strategy. That is, how to structure the beneficiary designation on the IRA beneficiary designation form and integrate it with the beneficiaries designated in the Trust to accomplish a myriad of scenarios for the surviving spouse (or other beneficiaries) that do not have to be decided until after the death of the IRA owner.
Click here to download a copy of the LWP IRA Beneficiary Designations Decision Tree. And to learn more about Clark v. Rameker join our FREE webinar THIS Wednesday, December 17th at 7:00 ET. Register now. It's 100% free! We'll see you then.
Dave Zumpano
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