The Wealth Counselor

 

A monthly newsletter for wealth planning professionals
Prepared by The Advisors Forum

Edited and distributed by

 

 Carrell Blanton Ferris & Associates, PLC  
Attorneys-at-Law

 

 
July 2014
In This Issue
How to Protect Inherited IRAs After the Clark v. Rameker Decision

 

In previous educational seminars we have mentioned that we had concerns that IRA assets, once inherited, may not be protected.  The recent Supreme Court decision, Clark v. Rameker, has confirmed our thoughts on inherited IRAs.  We will be presenting several one (1) hour seminars to cover this important topic which is also discussed in this month's newsletter.  Join us as we discuss ways that estate planning can be used to provide protection for inherited IRAs.

   

Please click on one of the below dates to register.  

(A light breakfast will be provided at the morning seminars.)      

 

RICHMOND

7275 Glen Forest Drive, Suite 310, Richmond, VA

 

Wednesday, July 16 at 8:00 a.m.   

Wednesday, July 23 at 8:00 a.m.  

 

VIRGINIA BEACH

Holiday Inn, 5655 Greenwich Road, Virginia Beach, VA  

Thursday, July 24 at 8:30 a.m.  

 

780 Lynnhaven Parkway, Suite 150, Virginia Beach, VA  

Wednesday, July 30 at 12:30 p.m. (light lunch provided) 

 

Call 804.285.7900  or 757.689.8668 .for questions or to register by phone.

Continuing education credits for this workshop are pending. 

 

  

If there are further developments on this topic, we will cover updates at our Fall CE Workshop.  The full 3-hour CE Agenda will be sent at the end of August.    

 

Upcoming Public Seminars 
Wills vs Trusts Seminars

If you have not attended one of our Wills vs. Trusts seminars, please take this opportunity to join us.   On July 23 in Richmond and July 24 in Virginia Beach, we have seminars starting at 10 a.m.   Attend our breakfast meeting on IRAs and then stay for our Wills vs. Trusts workshop.   
 
Please let your clients know about our educational seminars   
There is no charge, but seating is limited
 
Contact us if you would like a speaker for your firm or a private seminar for your clients.  
  

For printable copy of this article

 

How to Protect Inherited IRAs After the Clark v. Rameker Decision

(Content provided by Advisors Forum;  

Reviewed and edited by M. Eldridge Blanton, III, Esq.)

 

  

In a unanimous decision handed down on June 12, 2014 (Clark v. Rameker), the United States Supreme Court held that inherited IRAs are not "retirement funds" within the meaning of federal bankruptcy law. This means they are therefore available to satisfy creditors' claims.  

 

The Court reached its conclusion based on three factors that distinguished an inherited IRA from a participant-owned IRA:

 

1.     The beneficiary of an inherited IRA cannot make additional contributions to the account, while an IRA owner can.

2.     The beneficiary of an inherited IRA must take required minimum distributions from the account regardless of how far removed the beneficiary is from actually retiring, while an IRA owner can defer distributions at least until age 70 1/2.

3.      The beneficiary of an inherited IRA can withdraw all of the funds at any time and for any purpose without a penalty, while an IRA owner must generally wait until age 59 1/2 to take penalty-free distributions.

 

These factors characterize an inherited IRA as money that was set aside for the original owner's retirement and not for the designated beneficiary's retirement. This simple analysis has sent shock waves through the estate planning and financial advisory worlds, because its logic is also applicable to all inherited defined contribution retirement plan accounts, including inherited 401(k) and 403(b) accounts. What can be done to protect inherited IRAs from creditors? Could state law still protect inherited IRAs? In this issue we will answer these questions and provide guidelines for you and your team to follow when advising clients on who or what to name as the beneficiaries of their IRAs.

 

What Can Be Done To Protect Inherited IRAs From Creditors?

 

In view of the Clark decision, clients must thoughtfully reconsider any outright beneficiary designations for their retirement accounts if they want to insure that the funds will remain protected for their beneficiaries after death. By far the best option for protecting an inherited IRA is to create a Stand-Alone Retirement Plan Trust for the benefit of all of the intended IRA beneficiaries. If properly drafted, this type of trust offers the following advantages:

 

 

*      Protects the inherited IRA from each beneficiary's creditors as well as predators and lawsuits

*      Insures that the inherited IRA remains in the family bloodline and out of the hands of a beneficiary's spouse, or soon-to-be ex-spouse

*      Allows for experienced investment management and oversight of the IRA assets by a professional trustee

*      Prevents the beneficiary from gambling away the inherited IRA or blowing it all on exotic vacations, expensive jewelry, designer shoes and fast cars

*      Enables proper planning for a special needs beneficiary

*      Permits minor beneficiaries, such as grandchildren, to be immediate beneficiaries of the inherited IRA without the need for a court-supervised guardianship

*      Facilitates generation-skipping transfer tax planning to insure that estate taxes are minimized or even eliminated at each generation.

 

Drawbacks to tying up an IRA inside a trust include compressed tax brackets which max out at $12,150 of income (in 2014), ongoing accounting and trustee fees, and the sheer complexity of administering the trust year after year. In addition, even a well-drafted trust can be completely derailed by an uncoordinated IRA beneficiary designation. Therefore, all of the pros and cons of a Stand-Alone Retirement Plan Trust must be carefully considered before committing to this strategy.

 

Planning Tip: In most cases a standard revocable living trust agreement will not be well-suited to be named as the beneficiary of an IRA. This is because in order to provide all of the benefits listed above and avoid mandatory liquidation of the inherited IRA over a period as short as five years, the trust agreement must be carefully crafted as a "See Through Trust." A See Through Trust insures that the required minimum distributions can either remain inside the trust (an "accumulation trust"), or be paid out over the oldest trust beneficiary's life expectancy (a "conduit trust").

 

Thus, a Stand-Alone Retirement Trust that has specific provisions for administering retirement accounts, and that is separate and distinct from a client's revocable living trust that has been drafted to address the entire gamut of the client's non-retirement plan assets, is the preferable type of IRA trust beneficiary.   If your clients have not considered a Stand-Alone Retirement Trust before the Clark decision, then the time is now to educate them about its far-reaching consequences and how a Stand-Alone Retirement Plan Trust can benefit their IRA beneficiaries.

 

Could The Clark Decision Put IRAs Inherited By Spouses at Risk?

 

The Clark decision dealt with an IRA inherited by the daughter of the owner. What if the IRA was instead inherited by the spouse of the owner, would the decision have been different?

 

When a spouse inherits an IRA, he or she has three options for what to do with it:

 

1.     The spouse can cash out the inherited IRA and pay the associated income tax.

2.     The spouse can maintain the IRA as an inherited IRA.

3.     The spouse can roll over the inherited IRA into his or her own IRA, after which it will be treated as the spouse's own IRA.

 

In scenario 1 the cashed-out IRA will not have any creditor protection since the proceeds will become commingled with the spouse's own assets. Extending the Supreme Court's rationale to scenario 2, the inherited IRA will not be protected from the spouse's creditors since the spouse is prohibited from making additional contributions to the account, may be required to take distributions prior to reaching age 70 1/2, and can withdraw all of it at any time without a penalty. In scenario 3, a rollover is not automatic, and even after a rollover is completed, the inherited funds were certainly not set aside by the spouse for his or her own retirement before the rollover was initiated.

 

As a result of the Clark decision, will an IRA inherited by a spouse lose its qualification as a "retirement fund" under federal bankruptcy law once it is actually inherited by the spouse? Could the rollover of an inherited IRA into the spouse's own IRA now be considered a fraudulent transfer under applicable state law? Unfortunately the answers to these questions are not clear at this time.

 

Planning Tip: Provisions can be made in a Stand-Alone Retirement Plan Trust 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 IRA beneficiary designation which includes a Stand-Alone Retirement Plan Trust and disclaimer planning can offer a great deal of flexibility for clients who want to insure that their hard-saved retirement funds stay in their family's hands and out of the hands of creditors and predators.

 

Could State Exemptions Still Protect Inherited IRAs?

 

In the wake of the Clark decision, a handful of states - including Alaska, Arizona, Florida, Idaho, Missouri, North Carolina, Ohio and Texas - have either passed laws or had favorable court decisions that specifically protect inherited IRAs under state bankruptcy exemptions for federal bankruptcy purposes. If the IRA beneficiary is lucky enough to live in one of these states, then the beneficiary may very well be able to protect their inherited retirement funds by claiming the state exemption instead of the federal exemption.

 

Planning Tip:

Caution should be used in relying on state exemptions to protect a beneficiary's inherited IRA. People are more mobile than ever and may need to move from state to state to find work, pursue educational goals, or be closer to elderly family members in need of assistance. Aside from this, federal bankruptcy laws now require a debtor to reside in a state for at least 730 days prior to filing a petition for bankruptcy in order to take advantage of the state's bankruptcy exemptions. Therefore, long-term planning should not rely on a specific state's laws but instead should take a broad approach.

 

 

Planning Tip: Virginia law specifically ties IRA protection to federal bankruptcy law. Since Clark was a bankruptcy case, it is clear that Virginia law does not protect inherited IRAs.

 

The Bottom Line

 

Given the amount of wealth held inside retirement accounts, planners have to become adept at helping their clients figure out who or what to name as the beneficiary of these special assets. The Clark decision has amplified the need to become knowledgeable about the pros and cons of all of the different beneficiary choices for retirement assets.

 

This is certainly not one-size-fits-all planning and can only be done on an individual case-by-case basis. We are here to answer all your questions about protecting beneficiaries of retirement accounts through Stand-Alone Retirement Trusts, disclaimer planning, and layered beneficiary designations.

 

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person, and (ii) each taxpayer should seek advice from a tax adviser based on the taxpayer's particular circumstances.

 

 

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Carrell Blanton Ferris & Associates, PLC

www.carrellblanton.com

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