The “Daily Plan-It”
Keating Law, PLC
Volume 12, Issue 5 3/11/2010
© 2010 Keating Law, PLC, Phone: 586-498-8400. All rights reserved.
Protect Your Client’s Beneficiaries with a Creditor-Proof IRA Trust
The combination of tax deferral and asset protection is a potent, long-term legal and financial strategy.
In many states, IRAs and other retirement plans are exempt from the claims of creditors of the IRA’s owner. In other states, they are not.
The question that many advisors are watching is a critical but different issue.
Inherited IRAs at Risk of Creditors
If an original owner dies, and the IRA is not liquidated but instead becomes an inherited IRA by the beneficiary, will the IRA be protected from the claims of the beneficiary’s creditors?
This can be a significant concern for an owner of an IRA, such as a parent or grandparent, who wants to leave the IRA to a beneficiary, but who also is worried that it may be snatched up by a creditor. The key question to examine is how your state’s law addresses this issue.
In Florida, the court decided that inherited IRAs are not protected from creditor claims. The court reasoned that the IRA exemption applied only to the original owner and did not extend to the beneficiary (Robertson v. Deeb - http://bit.ly/c3jdIr).
Texas bankruptcy courts reached the same conclusion in In re Jarboe, 2007 WL 987314 (Bkrtcy. S.D. Tex. 2007). In this case, Mom died leaving her IRA to Son. Several years later, Son filed for bankruptcy, and claimed that the IRA was exempt under the state property code.
The bankruptcy trustee, however, asserted that the inherited IRA was not exempt and the court agreed.
Minnesota Says IRAs are Protected
In a recent case, In re: Nessa, 105 AFTR 2d 2010-XXXX, 01/11/2010, the bankruptcy court ruled the opposite. It said that it was protected.
The key difference in this decision is that Minnesota adopted the federal property exemptions from bankruptcy law, whereas Florida and Texas used state exemptions.
Even if your clients live in a state that protects IRAs, their children might one day move to a state such as Texas or Florida that does not.
What Can Be Done?
Don’t let clients take chances with their hard earned retirement money. Our recommendation is to leave IRAs to beneficiaries in a standalone IRA Trust to ensure maximum protection from creditors.
If your client dies without establishing a standalone IRA Trust, there may still be options available.
A beneficiary who receives an IRA from anyone other than a spouse, and is concerned about its availability to creditors upon bankruptcy, may wish to reinvest the proceeds in exempt assets such as a homestead.
As always, I hope this article has been of help to you and your clients. If you have a specific concern or case you’d like to discuss, please contact our office.
Thomas H. Keating has actively practiced law for 25 years, focusing on business and estate planning, with emphasis on the automotive and construction industries. Mr. Keating belongs to the State Bar of Michigan, the American Bar Association Section on Real Property, robate and Trust Law, the State Bar of Michigan Section on Probate and Estate Planning, NAIFA, and the Michigan Forum of Estate Planning Attorneys. He is the founder of the Financial and Estate Planning Keeping Current Series as well as the East Side Business and Financial Forum and is a member of the Financial and Estate Planning Council of Detroit. Mr. Keating is a member of WealthCounsel, a national forum of estate and business planning professionals, multiple chambers of commerce, and industry associations, and is a frequent speaker at estate planning forums around Michigan. Mr. Keating is co-author of Strictly Business, book written for those facing business and succession planning challenges.