Last June, the United States Supreme Court issued a ruling that removed bankruptcy protections from inherited retirement accounts, meaning those assets are now fair game for creditors. The Court explained in its unanimous opinion in Clark v. Rameker that inherited retirement accounts are different than traditional retirement accounts. That’s because beneficiaries cannot contribute to them, must take minimum distributions, and can draw funds out at any time for any reason without penalty. Essentially, it is not a “retirement account” in the traditional sense. Don’t be fooled, this ruling could have a profound, widespread impact for anyone looking to leave assets behind when they pass away.
For instance, picture a family in which a widower father passes away and leaves an IRA to his lone surviving son, who is a builder. After some time, the economy turns and the son’s business drops, forcing him to file for bankruptcy—and then the debt collectors start coming.
Prior to the Court’s ruling, in many states, the inherited IRA would have been protected from creditors, allowing the son to keep the assets in the family, likely as his father wished. But now, dad’s nest egg is fair game. That’s just one of numerous possible scenarios families can experience.
Safeguarding an estate in a new era
While every family and situation is different, everyone wants to control their estate as much as possible. The June ruling was a simple decision for the Court. And agree or not, it resulted in more tools becoming available for families to protect their wealth.
As an elder care attorney, my goal is to help families plan for the future, protect their assets and receive the financial and medical benefits due to them. The ruling is already affecting my clients and anyone looking to leave assets behind for their loved ones, particularly if they want to ensure their children and grandchildren are taken care of.
One strategy I use with clients is an IRA inheritance trust agreement, which provides protections to retirement accounts as they are passed to beneficiaries. This allows for specificity and protection of a family’s wealth, as clients can attach strings to distributions, giving families more options—and safeguards—over their estates long after they pass away.
Flexibility, control for families
Consider the following scenario. Mom and dad had multiple kids, but unfortunately, they all really don’t have their acts together—after all, there are plenty of obstacles out there, whether it’s gambling, drugs or marital problems. It’s unfortunate, but all too common. The worst thing you can do is give a child unrestricted access to assets, because they’ll likely blow it. Even with the best kids, it’s gone in a couple years. With some kids, it’s gone in a couple weeks. Having the ability to control the estate makes setting up a trust a great idea for a lot of families.