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Financial Planning > Trusts and Estates > Trust Planning

How to protect inherited IRAs

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In June 2014, the U.S. Supreme Court ruled that an inherited IRA will not be treated as a retirement account for purposes of bankruptcy protection in Clark v. Rameker, 573 U.S. (2014).

Thus, amounts held in an inherited IRA will be available to the beneficiary’s creditors (unless state law provides for such protection, as is the case in Alaska, Arizona, Florida, Idaho, Missouri, North Carolina, Ohio and Texas). 

For spousal beneficiaries, rolling the IRA into his or her own IRA should afford the rollover IRA the full protection of the bankruptcy code (similar to any other IRA). Be aware, however, that rolling over an IRA to a spouse’s own IRA in the middle of a legal proceeding could be deemed a fraudulent conveyance. Non-spousal beneficiaries cannot rollover an inherited IRA and, therefore, may prefer to inherit an IRA via a trust for their benefit when asset protection is a concern. 

Advantages of IRA trusts 

Even if the participant doesn’t expect the beneficiary to go bankrupt, there are other advantages to having IRA benefits payable to a trust, including:

    • Preventing beneficiaries from “cashing out” the inherited IRA and, instead, forcing them to “stretch out” the benefits (in order to maximize the tax deferred accumulation within the IRA).

    • Protecting the beneficiary from creditors, including ex-spouses.

    • Assuring that the IRA remains in the participant’s bloodline.

    • Permitting minor beneficiaries (such as grandchildren) to have access to the inherited IRA without the need for a court-appointed guardian.

    • Providing professional asset management.

    • Protecting a special needs beneficiary from losing his/her government assistance. 

    • Facilitating generation-skipping transfers to reduce estate taxes.

Spousal rollovers offer advantages over trusts 

Despite the many advantages of naming a trust as the beneficiary of an IRA, major income tax benefits are lost by not naming the participant’s spouse as the beneficiary. A spouse can rollover the IRA into his/her own IRA and defer distributions until attaining age 70½. Another advantage of a rollover is that the spouse can use the more favorable “uniform life expectancy table” that applies to IRA owners (rather than the “single life table” that applies to inheritors), resulting in smaller required minimum distributions (RMDs) each year. 

In addition, upon the spouse’s death, a “flip” to the life expectancy of the beneficiaries (e.g., children or grandchildren) to calculate their RMDs occurs. Finally, rolling over the IRA allows the spouse to convert his/her IRA to a Roth IRA. This option is not available to non-spouse inheritors. 

Trust must qualify as a “designated beneficiary” 

Naming a trust as the beneficiary of an IRA requires satisfying a number of conditions so that the beneficiaries can stretch the benefits over their life expectancies. If a trust meets all of the following conditions, then the beneficiaries are treated as “designated beneficiaries” and RMDs will be based on the life expectancy of the beneficiary (allowing a longer period to stretch the payments from the IRA, thereby increasing income tax deferral):

  1. The trust must be valid under state law.

  2. The trust must be irrevocable at the death of the account owner.

  3. The beneficiaries must be identifiable from the trust instrument.

  4. Certain documentation must be timely provided to the plan administrator.

If the trust does not satisfy all four conditions, then the “no designated beneficiary” rule applies. Under this rule, if the account owner dies after the required beginning date (RBD) — typically the year after the IRA owner attains age 70½ — then the RMDs are based on the single life table for the account owner’s age as of his/her birthday in the year of his/her death (a period not lasting more than 15.3 years). And, if the account owner dies before his/her RBD, then all amounts must be distributed from the IRA no later than the fifth year following his/her death. 

Conduit trusts 

The most common forms of trusts that are used as beneficiaries of IRAs are conduit trusts and accumulation trusts. A conduit trust requires all distributions from the IRA (not just RMDs) to be paid out to the beneficiary using the single life table. The trustee has no power to accumulate IRA distributions made to a conduit trust. A conduit trust is the only type of trust that is guaranteed to be treated as a “see through” trust.

In other words, you can see through the trust to its beneficiaries to get designated beneficiary treatment (and the favorable RMD rules). With a conduit trust, the life expectancies of successor or contingent beneficiaries can be ignored in satisfying the designated beneficiary requirement and in calculating RMDs. If there are multiple beneficiaries of the conduit trust, then the RMDs are calculated based on the oldest beneficiary’s life expectancy. 

Of course, once RMDs are distributed to the trust beneficiary, those distributions will be subject to the claims of the beneficiary’s creditors. But the balance of the IRA will be controlled by the trustee and, therefore, protected from the beneficiary’s inability, disability, creditors and predators, including ex-spouses.

A conduit trust is particularly attractive where the trust beneficiaries are young (e.g., grandchildren), because the RMDs will usually be small and likely payable to a custodian anyway.

Accumulation trusts 

With an accumulation trust, the trustee is not required to immediately distribute withdrawals from the IRA. The advantages of accumulating distributions are: asset protection, bankruptcy protection, divorce protection, spendthrift protection, protecting needs-based government assistance, incentive distributions, and further tax planning.

The disadvantage of an accumulation trust is that the life expectancy of the oldest beneficiary must be used to calculate the RMD. This includes contingent beneficiaries, as well as potential appointees under both lifetime and testamentary powers of appointment. 

Standalone IRA trusts 

While either a conduit trust or accumulation trust can be referenced in the IRA owner’s revocable living trust (to be funded at the owner’s death), it may be advisable to establish a standalone conduit trust or accumulation trust (separate from the IRA owner’s living trust). The reason is that most revocable living trusts are not well-suited to be named as the beneficiary of an IRA. This is because the trust must meet very specific requirements in order to avoid mandatory liquidation of the IRA over a period as short as five years.

Another reason, with respect to a conduit trust, is that you must use the oldest beneficiary’s life expectancy to calculate RMDs. 

Provisions in living trusts that can cause the loss of designated beneficiary status include payment of debts, taxes and expenses, accounting for principal and income, powers of appointment, and naming charitable beneficiaries. While it’s possible to firewall these provisions with a conduit trust, it’s much more complicated when using an accumulation trust.

A standalone conduit trust or accumulation trust is custom drafted to satisfy the designated beneficiary rules, easier for the IRA custodian to read and understand (thereby facilitating the funding of the trust in an expeditious manner), and alerts the beneficiaries to the fact that the IRA has special treatment. 


Given the vast amount of wealth inside IRAs, careful consideration is required in naming beneficiaries. The Clark v. Rameker decision has brought attention to the advantages and disadvantages of naming trusts as beneficiaries of inherited IRAs. This is certainly not a one-size-fits-all planning option and, therefore, the need to consult with advisors familiar with IRA trusts is important. 

See also:

Add life insurance to your wealth transfer toolkit

401(k) contribution limits rasied to $18k



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