Serving Clients Throughout Wisconsin

Another Reason for Regular Plan Maintenance

US Supreme Court Case Regarding Inherited IRA May Create Need for Additional Trust Planning

A Wisconsin woman finds herself at the center of a highly significant case regarding estate and retirement planning, with the US Supreme Court recently wrapping up oral arguments in the case. The dispute involves an individual retirement account the woman’s mother left to her as an inheritance, and whether the account qualifies as “retirement funds” that are protected from the daughter’s creditors in bankruptcy. Depending on the outcome, the Supreme Court’s ruling may create a need for some some people seeking to leave their retirement accounts as inheritances to explore additional estate planning options to ensure the protection of those assets.

Ruth Heffron set up an IRA in 2000, placed $293,000 in it, and named her daughter, Heidi Heffron-Clark, as the sole beneficiary. A year later, Heffron died. In 2010, Heffron-Clark and her husband declared bankruptcy. While previous courts had generally ruled that inherited IRAs qualified for the “retirement funds” protection afforded by the Bankruptcy Code, the 7th Circuit Court of Appeals decided the opposite in Heffron-Clark’s case, concluding that the Bankruptcy Code’s retirement funds protection only existed as long as an IRA was going toward the retirement of the original account owner. Once the owner dies, the money ceases being retirement funds and becomes just a “time-limited tax-deferral vehicle”. That meant that, in Heffron-Clark’s case, the IRA her mother left to her stopped qualifying as retirement funds the moment the mother died.

The 7th Circuit’s ruling runs contrary to some previous federal appeals court rulings on the topic. If the Supreme Court adopts the same position as the 7th Circuit, it would substantially alter the current understanding about the extent of the protection afforded to retirement accounts. Retirement funds transferred to beneficiaries as a result of the death of the original account owner may have no protection at all from the beneficiaries’ creditors.

One way to mitigate or prevent this exposure is through the use of trust planning. As one example, you could name your living trust, instead of an individual loved one, as the beneficiary of your retirement account. If your trust has a clause in it creating spendthrift protections and the correct language required by the federal Tax Code regarding taxation at your death, then your retirement account would be protected. Your trustee would then manage the retirement account for the benefit of the person you would have otherwise named as the beneficiary of the account. Even if the Supreme Court does not agree with the 7th Circuit in ruling that retirement accounts are not protected from creditors in bankruptcy, utilizing your trust to protect your retirement funds may still make sense for your family.

The laws that impact estate planning and asset preservation can change at any time. That is why it is important to engage in regular upkeep on your plan. A plan that was perfect for you a year or two ago may no longer be optimal if the laws have changed. For thorough review and maintenance of your plan, call Madison estate planning attorney Daniel J. Krause of Estate Law Partners, LLC. Our office can provide you with knowledgeable advice and up-to-date information about how to keep your plan operating at peak performance. Contact Attorney Daniel J. Krause today.

Reach us through our website or call our office at (608) 292-5185 to schedule your confidential, no obligation initial consultation.



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