Modern Estate Planning Blog

Fair Oaks trust lawyers are abuzz following a recent US Supreme Court decision that will have big implications for clients. The fact that these professionals keep up-to-date on legislation and court decisions that affect their clients is one of the most important reasons not only to hire an estate planning lawyer in the first place, but also to check in with the attorney at least annually to see if any changes need to be made to a previous plan in light of new information.

While a person’s own IRA can be protected in the case of bankruptcy, the court has determined that an inherited IRA cannot. While that is big news for those who have already inherited an IRA, it is a call to action for those planning to leave one behind. Being aware of the consequences of the Court’s decision can drastically change the approach to planning in order to protect heirs from this new development.

It is common for estate planning lawyers in Fair Oaks to see clients who have much of their wealth in the form of an IRA or 401(k). During the planning process, they determine where that money should go after their death. It often makes up a large part of the estate they intend to leave behind. Until recently, this was commonly done by naming beneficiaries outright. Now, however, if the beneficiary declares bankruptcy, that money can be taken away.

A Real-Life Example of Savings and Loss

The possibility of losing an inherited retirement account in this manner is more common than you might expect. Take for example the case of Joan and Robert.  Robert worked hard to save for retirement, accumulating $450,000 in his 401(k). Unfortunately, he was also diagnosed with a serious medical condition and accumulated over $300,000 in medical debt before he passed away.

After his death, his wife transferred the funds of the retirement account into an “inherited” IRA so that she could access the money without having to pay a 10% penalty before age 59 ½. That money was her lifeline.

However, the medical bills spiraled out of control and were eventually turned over to a collection agency. Unable to pay back the balance, Joan was forced into bankruptcy. Little did she know that the money in her “inherited” IRA could now be seized by creditors during the bankruptcy proceedings. Had Robert planned for this possibility, the funds would have stayed protected.

Protecting Wealth In An IRA For Beneficiaries

In order to protect money in an inherited retirement account, many estate planning lawyers in Fair Oaks are now recommending that their clients consider setting up a Standalone Retirement Trust. This type of trust can protect against other threats, too. Basically, it makes the money inaccessible to any future creditors of the trust’s beneficiary because the trust was not established or funded by the beneficiary. By naming an independent trustee rather than having the beneficiary play this role, there are even more protections in place. A Fair Oaks trust lawyer can offer a variety of suggestions on how to choose the appropriate trustee.

There are some fairly stringent guidelines that need to be followed to make sure the trust works as intended. A trust lawyer in Fair Oaks will need to make sure these regulations are adhered to so that the trust can qualify. When done properly, the trust’s distributions can be made similarly to how they would have from the IRA without the risk from the beneficiary’s creditors.

Whether you are just beginning the planning process or you have already created an estate plan, this big decision by the US Supreme Court can affect you and those you leave behind. Make sure to contact your trust lawyer in Fair Oaks to ensure that your IRA is protected for the next generation.

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