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Hellmuth & Johnson PLLC

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Protecting your retirement plan for your beneficiaries

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For many of our estate planning clients, retirement accounts represent a substantial portion of their estate.  And for many years clients have rightfully assumed that their retirement accounts would be safe from attachment by their creditors and that the same held true for those retirement accounts in the hands of their family members who inherit those accounts.  However, over time, that protection has been eroded, primarily as a result of action by Congress and several states limiting the amount in those accounts that could be protected by exemption from creditors. 

Then last year a case arose in a Wisconsin bankruptcy court.  The bankruptcy court refused to allow a bankruptcy debtor’s claimed exemption of an IRA inherited from her mother.  The District Court reversed the Bankruptcy Court, and the Seventh Circuit Court of Appeals reversed the Wisconsin District Court.  As a result the bankruptcy debtor was not allowed to exempt the inherited IRA and the bankruptcy trustee was allowed to take the IRA for the benefit of the creditors.  The Seventh Circuit’s order ran counter to the law in the Fifth Circuit and the Supreme Court agreed to hear the case.      

The Supreme Court heard the case in March of this year and on June 12, 2014 the Court released its decision in Clark v. Rameker, No. 13-299.  The court held that funds in an inherited IRA were not “retirement funds” that the debtor could exempt from her bankruptcy case under section 522(b)(3)(C) of the bankruptcy code.  The case did not involve an IRA inherited by a spouse and therefore the findings by the court will not apply to an IRA left to a spouse.

The Clark case has already necessitated changes in the way all of us plan for disposition of our IRAs at our death especially if the beneficiary is someone other than our spouse or if there are intended beneficiaries of the IRA after our spouse’s death.  The planning alternatives include:

  • Using qualifying trusts as beneficiaries;
  • Leaving their retirement plans to those not likely to file bankruptcy; or
  • Leaving their retirement plans to charity. 

The Clark case, by its facts, does not address:

  • Retirement benefits left for a spouse as noted above; or
  • Benefits of a retirement plan covered by a trust that includes a spendthrift provision such as a 401k.

Using a qualifying trust constitutes a viable alternative for most clients.  A qualifying trust is:

  • A trust valid under state law;
  • Irrevocable at the time of the trustor’s death; and
  • The trust provides for one or more qualifying beneficiaries.

Appointing a beneficiary of an IRA can involve important, technical issues including complicated tax issues and therefore it is advisable for all IRA owners to consult with their professional advisors prior to finalizing any beneficiary appointments.  Feel free to contact me regarding any questions involving beneficiaries on your IRA or your estate plan.