Options for protecting inherited IRA assets

On Behalf of | Jan 28, 2016 | Estate Administration & Probate |

For many people, saving for retirement is a chief and ongoing concern. In addition to a 401k, a Roth IRA is among the most common and beneficial financial vehicles used to save for retirement. A Roth IRA provides not only tax-savings benefits, but there are also no mandatory withdrawals which means that an individual can continue to contribute to and reap the benefits associated with estate tax savings and compounding interest.

In cases where an individual dies and contributed to and allowed assets held in a Roth IRA to grow for several years, the beneficiary named on the account is likely to inherit a considerable amount of assets. Unfortunately, while a spouse who inherits a Roth IRA is allowed to “roll the inherited IRA into their own,” this benefit doesn’t extend to an account holder’s children.

This means that assets inherited in a Roth IRA essentially are no longer protected and are subject to actions by creditors, divorces settlements and civil lawsuits. Thankfully, there are still ways that heirs who inherit IRA assets can effectively protect their inherited assets from these types of legal actions.

Using what’s known as a conduit trust, “the trust itself is named the beneficiary of the IRA funds. And an heir is, in turn, named the beneficiary of the trust.” A trustee, who is not the beneficiary, is then required to make monthly distributions of the trust’s assets to the heir/beneficiary. While assets that are distributed are subject to the above-referenced legal actions, the assets in the trust are protected.

Another option for individuals, who wish to pass down and protect their Roth IRA assets, is to establish an accumulation trust. This type of trust is established the same way as a conduit trust, however, the trust’s trustee is not required to make minimum monthly distributions. This can be beneficial in cases where a beneficiary is facing legal action by creditors. One important caveat to the trust’s benefits is that any income earned in excess of $12,150 via accumulation of assets and interest is subject to high taxes.

As with most estate planning matters, it’s always advisable to consult with an estate planning attorney who can provide advice based on an individual’s specific situation and long-term goals.

Source: Nerdwallet, “Protect Inherited IRA Assets From Creditors With a Trust,” Rachel Podnos, Jan. 26, 2016


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