Q: Should my client use an IRA Inheritance Trust as their primary beneficiary?
A: The US Supreme court ruled this past June, in Clark v. Rameker, that inherited IRAs are NOT protected from a beneficiaries’ bankruptcy. Previously, this was an open issue. Now, the only way to protect an inherited IRA from inclusion in the beneficiaries’ bankruptcy, is to have a correctly worded IRA Inheritance Trust named as the beneficiary. This will also protect the IRA principal from other creditors, or divorce proceedings.
However, if the distributions are paid directly to the beneficiary, they are NOT protected from bankruptcy or even attack in the event of a divorce. An IRA Inheritance Trust which also protects distributions from attack is called an “accumulation trust.” The trustee cannot be the child. The trustee has full discretion to hold distributions from the IRA in trust to protect the child or pass them out, depending on the circumstances. The child beneficiary may benefit from the distributed assets that the trust holds but does not own them individually. Obviously, if the child-beneficiary has no title or control of the IRA distributions, they cannot be taken by a charging order or other legal means of attack.