Have you heard the rumor that inherited IRAs are not safe anymore? This rumor began spreading since June 12, 2014 when the Supreme Court of the United States released its opinion in Clark v. Rameker, 2014 WL 2608860 (U.S.) (13‐ 299). The Supreme Court’s decision limits some of the advantages a beneficiary receives when that beneficiary inherits retirement savings. Clark v. Rameker is important because retirement savings are typically one of the most valuable assets that an individual owns. Upon death, individuals who still have retirement savings leftover when they pass away must dispose of these savings, usually by leaving them to family, friends, or charity. Valuable retirement savings might be given to a beneficiary through a last will and testament or a trust. This blog will (1) review the most important points of the Supreme Court decision, (2) explain why residents of Texas should not be affected as much, and (3) suggest steps for enforcing your inheritance plan and protecting the inherited assets. This blog is not an extensive treatise types of retirement savings. It is an introduction to a conversation that you should have with your financial advisor, accountant, and your inheritance and asset protection planner.
According to the Supreme Court’s blog, the Court’s ruling in Clark v. Rameker means that “Funds held in inherited Individual Retirement Accounts are not “retirement funds” within the meaning of 11 U.S.C. §522(b)(3)(c) and are therefore not exempt from the bankruptcy estate.” Clark v. Rameker, 2014 WL 2608860 (U.S.) (13‐ 299)(Emphasis Added). This decision does not affect every American everywhere; rather, it is applicable only to bankruptcy debtors who choose the federal exemptions and residents of states that do not have exemptions that include inherited individual retirement accounts. Federal bankruptcy law allows the debtor to choose whether he wants to use the exemptions provided by federal law or the exemptions provided by State law. 11 USC 522 (b)(3)(A). The statute listing property exempt under State law in Texas specifically protects “inherited individual retirement account.” Tex. Prop. Code § 42.0021(a) (2014). If you have chosen to live in the “have your cake and eat it too” State such as Texas, then a debtor in bankruptcy can choose the State property exemptions in bankruptcy and make sure that the IRA you inherited is exempt from liquidation in bankruptcy. Before you decide to allow the Federal government and the State of Texas to decide how and when your beneficiaries receive your IRA as an inheritance, you should consider several situations and factors and discuss them with your financial advisor, accountant and planner for protecting assets limiting liability and promoting family harmony.
Factors you should consider include protecting the assets of the inheritance you leave, the income tax liability for the beneficiary, and federal estate tax liability for the beneficiary. Think about the following circumstances when deciding how to design your inheritance plan: (1) that State that your beneficiary is domiciled (where he or she resides); (2) whether your beneficiary is disabled; (3) whether your beneficiary will waste the inheritance; and (4) whether your beneficiary’s profession, vocation, or work is highly mobile, risky, or subject to frivolous lawsuits.
A trust might help accomplish the goals of your legacy depending on your specific circumstances. See www. Marquardtlawfirm.com for more information on the advantages, benefits, and features of using a trust.
Circular 230 Disclaimer: to comply with IRS requirements, please be advised that, unless otherwise stated by the author, any tax advice contained in this blog is not intended or written to be used, and cannot be used, by the reader to avoid any federal tax penalty that may be imposed on the reader, or to promote, market or recommend to another any referenced entity, investment plan or arrangement.
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