On June 12th the Supreme Court of the United States handed down a decision stating that Inherited IRA’s are subject to the claims of creditors. For anyone who inherits an IRA, creditors or a spouse in a divorce can attach that inheritance if not properly planned. Even a surviving spouse can have a problem if he or she does not roll the IRA over into his or her own IRA.
One way to protect the IRA inheritance of any beneficiary is to use a qualified trust as beneficiary. Our office for example has a qualified trust that solves this problem.
Self directed IRAs (SDIRA) have been around since the early 1970s. In spite of their history, they haven’t been all the rage until more recently thanks to media attention. The biggest press was on former Republican candidate Mitt Romney’s SDIRA. It shouldn’t be believed that only the most wealthy can use SDIRA as part of their total retirement financial and estate planning.
SDIRA give everyone more control and investment options vs. regular IRAs. This is due to the individual being able to control the investments instead of a brokerage firm or bank. More than just being in control of the IRA, the SDIRA permits a whole lot of investments options instead of just traded securities. Examples include real estate, private equities, precious metals, and much more.
Not all is rosy with SDIRA. The assumption is that the manager of the IRA, the individual investor him or herself, needs to have some experience in the investments they are managing. Too often a manager or adviser is hired to assist the individual on the investments. This is an added cost.
Further drawbacks on tax and legal regulations. Provisions against self-dealing and avoiding too much involvement in the operation of a business are just a couple of the potential pitfalls.
SDIRA can be a part of a person’s financial and estate planning but care should be taken before taking hold of the wheels of this type of IRA.
This question usually gets asked by the family after a loved one has died and they are told they have to go through probate. How did this happen?
Yes, one of the benefits of a revocable trust is avoiding probate. The explanation everyone has heard is because the assets are held in trust there isn’t an estate to be probated. Instead, the successor trustee can access, get under control, liquidate and ultimately distribute the estate to the trust beneficiaries. So, if this is what is suppose to work, what went wrong? These are the most common cases of probates in spite of a revocable trust being in place:
Refinance. Very often when a client has a house in a trust decides to refinance the mortgage, the house gets transferred out of trust in order to make the financing go through. Too often the title company will transfer the property out but never takes any steps to transfer the house back in or even remind the owner that the house needs transferred back.
IRA or Insurance Beneficiary dies. If you have named a beneficiary of your IRA or life insurance and they die, often the contract states it will be paid to your “Estate.” This often means probate.
Leaving checking or investment accounts and vehicles out of trust. While you can have up to $75,000 outside of trust and not go through probate, sometimes accounts do not get titled in the name of the trust. If the total non-trust assets exceed $75,000, you may be in probate.
Mortgages. While a house may be in the trust, and therefore avoid probate, if you have to work with a lender, you will need to have an executor appointed to represent the decedent in all dealings with the lender. The same may apply to other debts or the IRS.
Of course most of these can be avoided with just being mindful that most assets need to be titled in the name of the trust.
Another trend in Living Trusts, or better said, Estate Planning, are IRA Qualified Trusts. Very often a individual does not want to leave a large IRA to their children or other heirs. The concern is they will cash it in and pay the large tax bill that will surely come when the IRA is liquidated.
One popular option is a special trust that can be the beneficiary of the IRA or other qualified plan. The trust can restrict the distribution of the IRA to over the life expectancy of the loved one. In essence, the heir can have the IRA, enjoy the benefit of the IRA but can only access the IRA over the number of years of their life expectancy. This is a good option for someone that may not be very wise with money or money management.
Note that your basic living trust may not accomplish this same goal and a special IRA trust is required.
If you have any questions, please give us a call at Knollmiller & Arenofsky, LLP.