June 2014 Alert Letter

Alert

On June 12, 2014, the United States Supreme Court, in a landmark case with far-reaching implications, ruled that inherited IRA accounts are no longer creditor-protected in a bankruptcy proceeding. Frequently, IRA owners designate their spouse as beneficiary when they die, with children or grandchildren almost always named as contingent beneficiaries. In light of this decision, doing so exposes these inherited IRAs to the claims of creditors.

IRAs are Individual Retirement Accounts that allow individuals to direct pretax income, up to specific annual limits, toward investments that can grow tax-deferred. Due to their tax advantages, IRAs often accumulate the most growth and are the last asset spent during one's lifetime, becoming one of the largest assets people have at death. An inherited IRA is one acquired by a non-spousal beneficiary of a deceased IRA owner.

Since IRAs offer protection from creditors' claims while the owner is alive, most people assume inherited IRAs will be similarly protected. However, the Supreme Court's ruling states otherwise. It is therefore more important than ever to consider establishing an IRA trust as beneficiary, rather than naming an individual outright. Trusts can help protect these assets from beneficiaries' existing or potential creditors, while also ensuring ongoing management and control over ultimate disposition, and allowing flexibility in distributing assets among individual beneficiaries.

Action Recommended

Everyone with beneficiaries or contingent beneficiaries other than a spouse should consider trusts as beneficiaries. It is important to schedule a meeting or phone call with an attorney to discuss whether a trust is appropriate in light of this recent landmark opinion. Schanker and Hochberg, P.C. offers these meetings at no fee; you can reach us at (631) 424-5400.