Estate Planning with IRAs

The Florida Supreme Court  recently ruled that a debtor’s inherited IRA may not be protected from creditor claims under Florida law. Consider this when structuring  the inheritance of your IRAs and other tax-qualified plans.

When a person dies, the IRA custodian offers the beneficiary of the IRA two options.  First is to transfer the original IRA into an inherited IRA, necessitating the beneficiary take minimal distributions (based on his life expectancy. This allows him to withdraw additional amounts with no penalty and permits the stretching out of the IRA distributions and limits the immediate taxation.

The 2nd option offered to the beneficiary is to hold the IRA in the deceased person’s account and permit the beneficiary to take monthly distributions over five years.

This option requires the beneficiary to cleaned out the IRA account faster but also provides him with instant asset protection during that five year period, shielding the inheritance from creditors, divorce and any judgment liens against the beneficiary…  at least, that’s what we believed.

According to Florida Statutes Section 222.21(2)(a), any “money or other assets payable to an owner, a participant, or a beneficiary from, or any interest of any owner, participant, or beneficiary in, a fund or account is exempt from all claims of creditors of the owner, beneficiary, or participant if the fund or account” is maintained as an IRA.  The same is true for ERISA plans, DROP plans, Pension plans, and annuities.  (Note: Life insurance and homestead investments also provide instant asset protection but are not pertinent to this discussion.)

In spite of the simple wording of the statute, the Florida Supreme Court recently concluded that Section 222.21(2)(a) doesn’t apply to inherited IRAs because they claim that the statute only references the original IRA fund and that inherited IRAs  are taxed differently. This renders them completely separate from the original account.

The Court’s argument is that an inherited IRA is a separate account which is created when the original passes to a beneficiary upon the original owner’s death.

The Florida Supreme Court’s reasoning is that the IRAs tax-exempt status changes because the beneficiary is required to take distributions.However, in my opinion, the Court forgets the fact that the original owner of the IRA would have to take minimum distributions beginning at age 70½ were he still alive.

While the Court clearly missed the mark when making this ruling, it  doesn’t change the fact that asset protection attorneys must now take this ruling into account when preparing and implementing an asset protection plan.

Change is the one thing we can all count on and  in keeping with this fact, Courts are not consistent regarding the asset protection of inherited IRAs.  Because of these inconsistencies, our law firm recommends that the initial owner of the IRA create a living trust as part of his comprehensive estate plan.

The beneficiary of the IRA should be the owner’s trust.  An irrevocable decendant’s trust is then created and funded upon the death of the original owner.  At that point, all of the assets from the IRA are completely protected by the beneficiary’s trust, while still being completely accessible by the beneficiary.

This entire process is obviouslyu very confusing but with IRA assets becoming an ever more significant portion of many clients’ estates, in situations in which creditor protection for a client’s beneficiaries is a concern, we should all remain acutely aware of the potential asset protection issues presented by inherited IRAs.

When planning your estate, or devising ways to protect your assets from creditor, litigators and other vultures, you should always work with a professional . Asset protection attorneys are trained specialists who will insure that a plan is  in place to protect your assets thoroughly and legally.

For more information about estate planning and asset protection techniques, please contact the Fort Lauderdale attorneys of Wild Felice & Partners at 954-944-2855 or via email at info@wfplaw.com.  Let us protect what you value most.