Thoughts on Advance Planning with Inherited IRAs

If you’re concerned about protecting your resources, here are a few thoughts on how to protect Inherited IRAs.

First, define the risk you’re planning to minimize or avoid. Some States might treat all retirement accounts as exempt resources for Medicaid eligibility purposes, while others do not. If you’re worried about nursing home expenses, find out what the rule is in your State . If the retirement account is an exempt resource, and if you are unconcerned about other risks, then leave the account alone. Take your distributions under the appropriate withdrawal schedule (10 years, except for a spouse, disabled person or a minor after the SECURE Act), and reinvest the after tax net elsewhere. We think you should get advice from a qualified financial planner, but put the money back to work if you don’t need it.

If you’re concerned about other risks, keep in mind that since Clark v. Rameker, 573 U.S. 122 (2014), inherited IRAs have no creditor protection under federal bankruptcy law. One protection strategy is to maximize your own retirement plan contributions, which decreases your tax liability on current income, and take enough from the inherited IRA to pay living expenses ordinarily covered by your paycheck. The funds you place in a qualified retirement account then have ERISA and bankruptcy law asset protection.

The Department of Labor had this to say about retirement account creditor protection: “In general, your retirement plan is safe from claims by other people. Creditors to whom you owe money cannot make a claim against funds that you have in a retirement plan. For example, if you leave your employer and transfer your 401(k) account into an individual retirement account (IRA), creditors generally cannot get access to those IRA funds even if you declare bankruptcy.” See FAQs about Retirement Plans and ERISA. You can do the same by funding a non-ERISA, retirement fund, but those accounts only have bankruptcy protection, which is limited to $1 million under Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005.

Since Clark v. Rameker, the way to protect beneficiaries who will receive inherited IRAs is with an IRA asset protection trust. Instead of naming the individual as beneficiary, you name a creditor protection trust as beneficiary. The funds must still be withdrawn under the SECURE Act’s schedule, but until they are distributed, the spendthrift protection in the trust protects the beneficiary from creditor claims.

If your concern is protecting the account, but not for yourself, another thought is to have your working children maximize their retirement account contributions in an ERISA plan, an IRA or a Roth. That teaches them to save early and provide them with protected retirement funds. Using the Rule of 72, if your 25 year old saves $6,000 and can achieve tax free growth averaging 7%, then the $6,000 contribution will be worth about $96,000 when your child is 65. You can then gift them funds from your inherited IRAs to make up any needs they have as a result of reduced take-home pay due to their increased contributions. If your children are too young to work, consider a 529 plan.

Finally, if you want to make charitable donations, the inherited IRAs are a good source of funds for that purpose. If you itemize, you can offset the income from taking inherited IRA funds with a deduction for your charitable gifts.

We’ve said this before, but we’re reminding you again. Get an umbrella liability policy. Nursing home bills are not the only risk out there and an umbrella policy increases your liability protection if you’re involved in a motor vehicle collision or if someone is harmed by your property or on your property.

Stay tuned for other advance planning thoughts.