Caution: Creditors are a Threat to Inherited Retirement Accounts

Contact Beaupre Law to get legal advice on retirement plans.

Do you have an individual retirement account or other type of retirement account (401k, 403b, IRA, Roth IRA) that you plan to leave to your loved ones? If so, proceed with caution: inherited retirement accounts do not have asset protection when they pass to your loved ones, meaning creditors can seize the money in the accounts to satisfy any claims against your beneficiaries.

Although spouses (and children, to a lesser extent) receive special treatment when inheriting a retirement account such as an IRA, the retirement account you leave for your spouse or child can still be seized in a divorce, a lawsuit, or a bankruptcy proceeding.

Three Options Available to Surviving Spouses and Children inheriting a retirement account
When your surviving spouse or child inherits your IRA, he or she generally has three options:

(1) Cash out the inherited IRA and pay the income tax

Warning! The cashed-out IRA will not have creditor protection and accelerates taxation. Once your spouse cashes out the account, he or she may use the money in any way. In addition, if your spouse dies before all the money has been spent, he or she can leave the money to anyone (even a mere acquaintance who was unknown to you).

(2) Maintain the IRA as an inherited IRA

Warning! The inherited IRA will not have creditor protection. However, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a spouse can take the required minimum distributions from this account over his or her lifetime without being held to the ten-year rule, as most other beneficiaries are.

(3) Roll over the inherited IRA and treat it as his or her own

Warning! The rollover may offer some creditor protection, but not in all cases. In addition, depending on whom your spouse leaves his or her retirement account to, there is now a larger sum of money to be distributed by the end of the tenth year after his or her death, accelerating additional income taxes for the next beneficiary.

Many find it frustrating that a stranger can swoop in and take their hard earned money. Fortunately, there is a solution: a properly drafted standalone retirement trust (SRT).

Properly Drafted Standalone Retirement Trusts Can Provide Creditor Protection

Fortunately, retirement accounts can be protected, but only if you take action. Enter the standalone retirement trust (SRT). Many people use SRT’s, a special type of trust that can protect retirement accounts. An SRT is designed to be the beneficiary of your retirement accounts after you die. It can protect your retirement account funds from your beneficiary’s creditors. In fact, we can include trust provisions that specifically protect your spouse in situations such as second marriages; divorce; lawsuits from car accidents, malpractice, or tenants; business failure; and bankruptcy.

Want To Know More?

The bottom line is that a properly drafted SRT is often your best option for protecting your retirement accounts after you die. Want to know more? Contact us today to schedule a conversation.