With the downturn in the economy, it is hardly surprising that creditors are getting more aggressive and creative in their efforts to reach the assets of debtors. There have been several cases recently which resulted in creditors successfully seizing a beneficiary’s interest in an inherited IRA.
As long as the IRA is $500,000 or less, the IRA owner’s creditors will not have a claim against the IRA and there is no requirement that the required minimum distribution be paid to the creditor. Therefore, if the IRA owner is careful, even after reaching age 70 ½, the distributions can be received and creditors will not be able to reach the distributions.
There is a fairly simple method to avoid a bad result and that is to make your trust the eneficiary of your IRA and then allow the trustee to accumulate required annual distributions and make distributions in the trustee’s discretion. With this approach, a creditor would be blocked from getting at the IRA because of the trust holding the IRA, as well as the accumulated distributions. The trustee can still make distributions, and because there is no duty on the part of the trustee to inform the creditor that a trust distribution will be made, the funds can be distributed out to the beneficiary with minimal risk of the creditor seizing them. Care must be taken in drafting the trust which will be the IRA beneficiary to ensure that maximum tax deferral of distributions will be achievable. If you are concerned about your beneficiaries losing the IRA they will inherit from you, it may be wise to give us a call to explore some solutions to these potential pitfalls.