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Leaving an IRA for an heir can be complex

by | Nov 13, 2014 | Trusts |

People in California may have seen a recent article about the issues involved in leaving an IRA to a person other than a spouse. For many people, an IRA or other retirement account is among their largest and most valuable assets, so it makes sense that people would want their beneficiaries to be able to enjoy this after they are gone. However, a recent Supreme Court case has posed some obstacles that people in this position should be aware of.

An IRA, pension or other retirement account is a common staple of most people’s estate plans. They are incredibly useful, since they provide guaranteed distributions and generally pass from a person to their named beneficiary without being subject to creditors or taxation.

However, the Supreme Court’s ruling in the case of Clark v. Rameker earlier this year said that those who inherit an IRA, other than the decedent’s spouse, are not receiving retirement funds, but rather those funds are subject to the same laws as other assets under the U.S. bankruptcy code. This means that the unused retirement money a person has at their death is essentially up for grabs if they have outstanding debts to other creditors, and their intended heirs may never see a dime of it.

Like many complex problems in estate planning, there is a trust for that. The easiest way to deal with this solution is to set up a trust for the purpose of “inheriting” the IRA upon the person’s death. By naming the trust as a beneficiary of a pension or IRA, a person is able to bypass creditors and ensure that the money goes to their intended heirs.

There are additional concerns about the use of IRA funds that people should discuss with an experienced California estates and trusts attorney, but the proper solution that avoids unnecessary taxation is easily obtainable through the appropriate trust instrument.

Source: Deposit “How Much Is Too Much to Protect Your IRA for Your Heirs?” Sheryl Nance-Nash, Nov. 3, 2014

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