Today’s important asset protection topic concerns “Beneficiary IRAs” and “IRA Beneficiary Trusts” and the question whether beneficiary IRAs are protected from creditor attacks. A follow up question is whether IRA beneficiary trusts should be used as additional protection? If this sounds complicated, worry not because I’ll work hard to make this all easy to understand.
Background on IRS Rules and IRAs
IRAs are governed by state and federal rules which often overlap but sometimes differ in areas such as asset protection. So it is important to review your state’s laws concerning IRAs to see if the state law offers more protection than the federal law.
Under Federal law (ERISA), up to 1 million of your IRA account is “asset protected” from your potential judgment creditors. However, recent court decisions have cast some doubt on whether the account is protected once it passes to your beneficiaries. Allow me to explain.
When you are parking money in an IRA, everything is pretty good on the asset protection front because if somebody sues you and obtains a legal judgment, there is little debate that the account cannot be seized or garnished by the creditor (up to 1 million of it at least as stated above).
However, if you die and the IRA account passes by “right of survivorship in Florida” (in accordance with your beneficiary designation) AND your beneficiary is subject to creditor actions (lawsuits, liens, garnishments, etc.), the entire beneficiary IRA account may be attached to those actions and thus may be at risk. This issue arose in recent cases such as the U.S. Supreme Court case of Clark v. Rameker OR the 2009 Second District Court (a Federal District Court in Florida) decision in Robertson v. Deeb OR the 2010 Middle District Bankruptcy Court decision in In Re Ard, all which decided in some way that a creditor was allowed to attach a judgment to a beneficiary IRA. These cases resulted in what Forbes predicted could be “mini boom” in estate planning due to the need to use trusts to protect beneficiary IRAs.
Protecting Your Beneficiary’s IRA With A Florida IRA Trust
The solution to this problem of legal vulnerability with beneficiary IRAs can be found, under the right circumstances, utilizing proper revocable living trust planning. Specifically IRA Trust provisions can be included as part of your Florida revocable trust (or a separate IRA Trust may be prepared) to hold your IRA proceeds. Such provisions are referred to as either “conduit” or “accumulation” provisions.
As always, a do it yourself trust or online form will not be adequate for this kind of planning for obvious reasons which include the detailed drafting necessary for these kinds of protections. I also note that the Florida revocable living trust or Florida IRA Trust must well drafted to include the adequate asset protection language to protect the trust assets for the beneficiaries. This type of legal mumbo jumbo is called “spendthrift protection.”
Dos and Don’ts When Considering IRA Beneficiary Trusts
First, there are a few important questions to consider when deciding whether to use an IRA Beneficiary Trust which are summarized as follows:
- Is there only 1 beneficiary or are there are number of beneficiaries (within the trust) to name?
- Is a spouse a primary beneficiary?
- Do the circumstances of the beneficiaries warrant extra protection?
- How does the trust affect the IRA stretch out?
- What other purposes does the trust serve?
Answering the above questions may lead to a number of additional questions and this is why this kind of planning should only be handled by a Florida estate planning attorney with IRA Trust experience.
A trust with 1 person would use that person’s life expectancy when figuring out withdrawals. If multiple beneficiaries are involved, there is a risk of the “stretch out” being shorter than without the trust unless certain measures are taken in the beneficiary designations to insure that the distribution is connected to the individual measuring life of the various beneficiaries.
If a spouse is a primary beneficiary, it is often better to leave him or her as the individual beneficiary rather than using the trust. The reason is that using a trust for a spousal beneficiary jeopardizes the spousal tax benefits from rolling the IRA into his/her own IRA and deferring distributions until 70 1/2. Often a solution is to name a spouse as a “primary beneficiary” and add “contingent beneficiaries” connected with the trust. There are circumstances; however, where the tax planning and other special provisions in the trust may benefit the spouse (and estate) and thus are preferable over the tax advantages of the IRA spousal roll over.
The circumstances of the beneficiaries should be a crucial factor when deciding whether to use an IRA Beneficiary Trust. For example, a beneficiary that is prone to alcohol or drug abuse OR has relationship difficulties OR financial problems may benefit greatly from the spendthrift protection and management oversight of a trust.
IRA Stretch Concerns
As mentioned above, the roll over provisions are a major factor in using IRA Beneficiary Trusts and this means that the circumstances must be given careful consideration. Skillful drafting in the trust language AND beneficiary designations is necessary to maximize the benefits of the IRA Beneficiary Trust.
Other trust purposes such as Florida special needs trust planning OR Florida dynasty trust planning so can be considerations when deciding whether to use an IRA beneficiary trust. These are both factors in your overall Florida asset protection plan AND Florida estate planning as well as your business continuity succession plan in Florida if you’re a business owner.
Good News in Florida Concerning Beneficiary IRAs
Will all of the above said, it isn’t as critical in Florida to use an IRA trust as it may be in other states. Remember at the beginning of this article when I so wisely stated that you should review your state’s laws to see if they offer additional protection over the federal laws.
In May of 2011, Governor Rick Scott of Florida signed House Bill 469 into law which basically overturned the cases discussed above, by creating a statute in Florida that protects beneficiary IRAs and this would supersede court decisions surrounding this issue.
As in all things legal, it is important to monitor changes in the law and get regular estate planning checkups in order to maintain a current and effective Florida estate plan. Nowhere is this more important than in this area that impacts tax planning and asset protection concerns directly.
Steve Gibbs, Esq.
This is an updated version of an original post dated September 11, 2014.