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A Better Partnership


Mar 2012
March 01, 2012

Estate Planning Tip: Inherited IRAs

New Decision Provides Protection for Inherited IRAs

In a recent case (In re Clark), the Wisconsin federal district court reversed a bankruptcy court’s decision and allowed an inherited IRA to be exempt in bankruptcy proceedings.  The debtor in the bankruptcy proceeding had inherited a sizeable IRA from her mother.  IRAs have a creditor protected status for an individual saver and investor as “retirement funds.”  This decision continues a recent trend toward allowing that protected status to be extended to the individual’s beneficiaries who receive the IRA upon death to the extent the funds are maintained as retirement funds in the inherited IRA.

Trusts May Still Be Appropriate and Useful for Protecting IRA Distributions

Despite this growing trend toward protecting inherited IRAs, making an IRA payable to a trust for creditor protection reasons is still appropriate if the beneficiary lives in a jurisdiction that has unfavorable or conflicting precedent or who might move to such a jurisdiction.  It should also be remembered that if the beneficiary has health problems and the creditor in question is or may be a nursing home or other health care institution, thought should be given to the possible need for Medicaid qualification.  The creditor protected status of an IRA will not matter if Medicaid qualification is needed.  Medicaid will simply require that the IRA be spent down prior to qualification unless the IRA proceeds are payable to and held in a supplemental needs trust.  IRAs can be made payable to trusts without adverse tax consequences if the trust is correctly designed.  This is true even for supplemental needs trusts which do not require the immediate distribution of all income (including IRA distributions) to the designated beneficiary.


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