Posts by Wendy Shick, CPA, CFP:
Last month, the U.S. Supreme Court unanimously ruled that inherited individual retirement accounts (IRA) are subject to creditor claims in bankruptcy. In layman’s terms … if you pass away and have an IRA and your IRA beneficiary has to declare bankruptcy, your IRA money could wind up in the hands of the creditors your beneficiary owes money to.
Because of this court ruling, if you have an IRA, you should consult with your advisors (attorney and financial advisor) who are experienced in asset protection, estate planning and income tax considerations for IRAs. This is especially important if you have a material balance in an IRA and an intended beneficiary has known or potential creditor issues.
Digging Into The Details
An inherited IRA is where an individual is named as a beneficiary on an IRA application document and the individual becomes the holder of an account after the original owner of the account passes away.
In Clark v. Rameker, the Supreme Court reviewed three important distinctions between an inherited IRA when compared to other traditional retirement assets. For an inherited IRA, the holders are:
- Not allowed to make additional contributions to the account
- Required to withdraw funds regardless of whether they have reached retirement age
- May withdraw assets at any time without an income tax penalty
Given these distinctions, the Supreme Court ruled that “funds held in such account are not objectively set aside for the purpose of retirement.” Experts on the subject have concerns about whether spousal rollovers continue to be exempt from creditors as well.
Some Planning Opportunities Remain
Going forward, inherited IRAs have fewer creditor protection characteristics. However, there are still planning opportunities available under some state creditor exemptions or by naming a qualified trust as the beneficiary.
If a trust is used as a beneficiary of an IRA, the trust must be drafted properly. The trust can help shield trust assets from creditors. Adding a trust as the beneficiary can make the process more complex and add additional costs to create and administer the trust. Also additional income tax burdens may exist, depending on the trust’s terms.
Overall, this ruling is particularly important if you own a significant IRA account or if you inherit an IRA. Have a conversation with your advisors to review all the rules before making beneficiary designations or transferring balances after someone’s death.
Ohio Tax Assistance
If you have questions and/or concerns about your retirement options, contact Rea & Associates. Our team of Ohio tax professionals can help you determine if the inquiry is legitimate, and assist you with responding.
Author: Wendy Shick, CPA, CFP (Mentor office)
Looking for other articles about inheritance options? Check out these articles:
We’re three months into 2014, and you may be thinking about what charitable donations you’d like to make this year. If you’re planning to make a donation to a qualified 501(c)(3) non-profit organization, make sure to look at your investment portfolio before you write a check. Read the rest of this entry “
Are you in the market for a new home? Or maybe you’re looking to purchase a new car for your daughter or son? Don’t have enough cash for a down payment? No problem. There’s a nice workaround that can provide short-term relief for your immediate need. Read the rest of this entry “
Tax deductions aren’t the only reason that you make charitable contributions – but they’re a nice perk! Unfortunately, the IRS has been cracking down on the documentation required for charitable contribution deductions. Here’s what you need to know to make sure that your charitable contributions get you the deductions that you deserve. Read the rest of this entry “
With our government requiring more cash each year, there is growing sentiment is the financial community that the IRS is becoming more vigilant in obtaining all revenue available related to Individual Retirement Accounts (IRAs). According to a recent article, the Treasury Inspector General for Tax Administration estimates that the IRS failed to collect as much as $286 million of revenue in 2006 and 2007 alone. From a political aspect, it is easier to raise revenue by simply enforcing the existing rules, than it is to cut spending or pass a new tax increase. Read the rest of this entry “
If you’re not yet nearing retirement age, Social Security probably means two things to you: the amount of money that disappears from your pay checks and the annual statements that you get in the mail. If you’ve ever taken the time to read these statements, you’ve probably learned some neat things about your finances – like your lifelong earning history and the amount of Social Security benefits that you’d receive if you were to need them right now. Read the rest of this entry “
Tax identity theft is an increasingly enormous problem. The IRS has been bombarding us with warnings of identity theft and scams this tax season.
Here’s a summary of some of the latest information you should know. Read the rest of this entry “
A question we hear quite often during tax season relates to when it is necessary to file a tax return for a dependent child. Some people think that money held in an account intended for college education is exempt from taxation. That is not the case, unless the account is an Education IRA or Section 529 plan. If the investments are held in a custodial account or held in the child’s individual name, the child is deemed the owner and the income is attributable to him/her. Read the rest of this entry “
If you took advantage of last year’s law change allowing you to convert your IRA to a Roth IRA, you face a big all-or-nothing tax payment decision on April 18: pay the taxes on your pretax contributions and gains in 2010, or split the tax bill between 2011 and 2012. Read the rest of this entry “
The IRS will not accept federal returns from taxpayers who claim itemized deductions until February 14. The delay is necessary for the IRS to program its systems to accommodate tax breaks included in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Read the rest of this entry “