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    Category Archives: IRA Rollover

    Supreme Court Decision Makes Inherited IRAs Fair Game in Bankruptcy

    A recent U.S. Supreme Court decision has changed the way inherited IRAs are viewed when it comes to bankruptcy, and calls for those who inherit these retirement account assets to find new ways to protect that inheritance.supreme court

    In Clark v. Rameker, Heidi Heffron-Clark inherited an IRA from her mother. She received distributions from that inherited IRA for several years before filing Chapter 7 bankruptcy. Ms. Heffron-Clark relied on the Bankruptcy Code, which states that IRAs are exempt up to $1.245 million from bankruptcy, to claim that her inherited IRA qualified for the retirement account exemption.

    In a unanimous ruling, the Supreme Court disagreed, distinguishing inherited IRAs from other IRAs established by an individual for his or her own retirement. Because the beneficiary of an inherited IRA cannot make contributions to that IRA, an inherited IRA does not provide any tax incentives, which is an important purpose of other IRAs. Since the beneficiary of an inherited IRA has different rules for taking distributions than other IRA owners, this also establishes inherited IRAs as different from other IRAs. These differences, the Court reasoned, are enough to disqualify an inherited IRA from qualifying for the federal bankruptcy exemption.

    Even though some states offer protection for inherited IRAs in bankruptcy, a move to another state that does not offer this protection can endanger inherited IRA assets. IRA owners who wish to provide their heirs with valuable protection should consider naming a trust as beneficiary of IRA assets instead of heirs, who could instead be designated as beneficiaries of that trust.

    The Court did not address spousal inherited IRA beneficiaries; however, since a spouse is allowed to roll over an inherited IRA into his or her own account, this may qualify a spousal inherited IRA for the bankruptcy exemption for retirement funds.

    We can help you plan for the safe, successful transfer of wealth to the next generation. Call your Newport Beach Estate Planning Attorneys today to schedule a time for us to sit down and talk about an Achieve Your Dreams Planning Session, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security.

    Inheriting a Non-Spousal IRA

    The rollover into a non-spousal beneficiary's receiving IRA (an IRA set up specifically to receive an inherited retirement plan distribution) must be accomplished via a direct (trustee-to-trustee) transfer that does not pass through the hands of the beneficiary (you).

    Inheriting non-spousal retirement funds can be very, very tricky. One mistake and boom! The IRS will descend with a vengeance.

    You can’t teach an old dog new tricks, but you can teach an inherited non-spousal IRA to “rollover” correctly. In fact, if you do not handle this basic financial transaction with care, then it will cost you.

    As with most tax moves, there is a wrong way and a right way.

    First, the wrong way. In former times you had no choice as a “non-spousal” inheritor of an IRA. You had to take the entire account balance as a “lump-sum” and take the tax hit. Similarly today, the result is the same if the money reaches you before it reaches an IRA trustee.

    Now, for the right way, as described in a recent article in SmartMoney titled Rolling Over Uncle Henry's 401(k). Essentially, you can let your inherited IRA spill over into a newly created IRA you establish to receive regular distributions from the inherited IRA. Note: the retirement funds you inherit cannot be accumulated tax-deferred in the newly created IRA, as under certain rules that apply to spousal IRA rollovers. In fact, you are required to make minimum withdrawals or face a 50% excise tax on the difference between what you should have withdrawn and what you actually did withdraw.

    For further guidance on the rollover “dance steps,” an article in Forbes is spot on. The article, titled IRA Rollovers – Let's Be Careful Out There, even reviews some recent court cases to illustrate the finer points of an entirely trustee-to-trustee rollover. Never let an IRA trustee of an inherited IRA write a check directly to you! Instead, instruct the trustee to talk to the new trustee of your newly created non-spousal beneficiary IRA to coordinate the transfer.

    Contact Meier Law Firm to discuss all of your estate planning needs.

    Reference: SmartMoney (August 9, 2012) “Rolling Over Uncle Henry's 401(k)

                      Forbes (August 2, 2012) “IRA Rollovers – Let's Be Careful Out There

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