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Financial Planning > UHNW Client Services > Family Office News

Protecting IRAs in the wake of the recent Supreme Court ruling

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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.

Using the inheritance trust agreement, mom and dad can control their estate after they pass by restricting distributions, maintaining the IRA creditor protections and much more. After all, mom and dad don’t want their estate going to the casino or their in-laws, which have turned into the out-laws.  They want it to remain in the family.  

The conduit function of an inheritance trust agreement can also be used to funnel assets to specific beneficiaries at specific times—namely, required minimum distributions—thereby leaving the balance to grandchildren for future use. This is essential to ensure that the IRAs have the ability to grow over time with the legal and tax protections afforded to retirement accounts.

Another scenario that pops up with some regularity is families who want to protect their estates while one or more beneficiaries are disabled and receiving government benefits like Medicaid assistance.

If the estate isn’t set up properly, leaving assets to a disabled son on Medicaid could cause him to lose his government benefits. Obviously, the family doesn’t want that, so we need to protect the assets and make sure they’re available for the beneficiary’s supplemental needs. In situations like this, protecting the governmental benefits along with the tax considerations is at the forefront.   Planning is essential

These are just a handful of scenarios elder law attorneys encounter. The future is unknown, so it’s more important than ever to plan. What does that mean exactly?

It’s really about understanding all the possible implications related to your clients’ estate. Avoiding probate is just one concern. You must also look at the families’ lifestyle issues, taxes or whatever else. Families need to consider their estate-related wishes and plan accordingly, taking advantages of all tools and strategies available to them. Sadly, most people are not aware that these tools exist, so it’s vital that they work with professionals who actually specialize in these areas and not those who just say that they do.

The client drawing up the estate plan should know the following when they walk in to meet with their chosen professional:

  • Who should receive the assets and when?
  • Are there any specific restrictions?
  • Who will carry out these wishes (especially when children and young adults are involved)

Have an “estate protection” team

In an ever-changing financial and regulatory landscape, families should have professionals working together to protect what they worked so hard to build. A team working on behalf of the family is vital, but getting started may be the real key.

I tell people all the time to set up your estate protection now and do your due diligence to find qualified pros who specialize in elder care. They must find a team that knows all of the tools in the toolbox and how to use them, because the more options available to the family, the better the plan.


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