Creditors Might Have Access to Inheritors’ IRA

           A Florida appeals court recently ruled that creditors had access to inherited IRAs previously thought to protected.  The court held that when the owner of an IRA dies, the instrument that passes to the beneficiaries is converted into a completely separate account which is then subject to applicable taxes. The law varies by state, and even the Florida ruling could be subject to further action by the state legislature. Given the uncertainty, the most prudent approach is to get proper counseling when designating your IRA beneficiaries and exploring all your options such as designating a trust as the beneficiary of an IRA.

            The appellant in Robertson v. Deeb contested an order denying his claim of exemption from an inherited IRA. Upon his father’s death, Robertson could choose to convert the inherited IRA into one of two accounts. Since a single owner did not continually maintain the account, the Florida court ruled that statutory protections that ordinarily protect IRAs from creditors did not apply.

            Creditor and tax exemptions for inherited IRAs are still unsettled issues in law. Although the Florida court’s rationale has been adopted by other states (Minnesota, Texas), the court’s ruling has generated controversy that may result in further legislative action in Florida and beyond. At the moment there are over $4 trillion dollars held in IRAs, so related asset protection issues are certain to be common in the near future. 

           
          One potential planning option worth exploring is to designate a trust as the beneficiary of the IRA. Although the IRA still converts to a new account type, the creditor protection intrinsic to the trust extends to the inherited IRA. The trust can then be structured so that a named individual has access to the trust without the risk of creditor exposure.

Its Never Too Late for A Priceless Conversation

My Aunt Pari has been diagnosed with Stage 4 lung cancer and I have been agonizing over how I can help her. Pari was the person who always took care of me as a child. She was basically my nanny.  When I was sick she was there to comfort me and give me soup.  When I couldn't sleep she would tell me stories about my father and how he worked so hard for us.  Pari does not have much in the way of material wealth, however, she has a treasure chest of stories about how my father and mother met and how they overcame great odds to create a true love story.

As an estate planning attorney, I felt like I was not taking care of my family properly. My dad passed away earlier this year after a 10 year battle with Alzheimer's.  My dad had a lot of great stories of his own about how he grew up in  a small 3rd world village and the challenging situations he often found himself in. I regret that I was never able to record any of his stories before he got sick or how his infectious laugh could light up a room. Once again, I see myself faced with losing an opportunity to capture our family's powerful story from those who built it from the ground up during the 1950's-1970's.

My aunt has been so sick that I felt it was very difficult for me to try and interview her now about our family history and I did not want to further burden her.  There was a limiting assumption in my mind that said "its too late to burden your aunt with telling the family stories."  I just learned that this assumption was absolutely WRONG.

On the advice of my colleagues from the National Network of Estate Planning Attorneys and the Sunbridge Legacy Network, I decided to push through my fears and I visited my Aunt yesterday. I have been visiting her a lot as of late, but I would just come to her home as a comfort to her. This time I decided to ask her some questions.  As she laid on her bed, I laid down next to her with a recorder and asked her to tell me the story again how she would go to the train station to pick up my mom back in the 1960s. My mom would come and visit my dad who lived near the Caspian Sea and it was a big event when she would come to visit. My aunt's eyes lit up and she began describing the train station in great detail and how dedicated my mom was to travel such a long way to see my father. She also told me how the house was so full of life when my older sister was born. She described how my mom had to work almost immediately after my sister was born so they could make ends meet.  She said those were difficult times but those were also the best of times. My aunt smiled when she described how everyone would make a fuss over my sister. She then described how life was like when my older brother was born and the trouble he would get himself into (she laughed). Then she talked about me and how happy my parents were when I was born. She gave me insights that gave me tingles that I will treasure forever.

This recording is a Priceless Conversation that no inheritance can match. I hope to have many more and I hope my aunt has the strength to tell them. I wish I had not waited so long to ask her about these stories.

LESSON:  I believe most of my clients believe they can "put these conversations off til later" but they are wrong. The best time to have these conversations is NOW. Talk about these memories while they are still clear in your mind so you can enjoy reflecting on them. It doesn't matter if you are 30 years old or 80 years old. These stories are fragile if not properly cared for and are likely to be lost forever. At least I have one story I will share with my kids that they will hear directly from the source. I can't put a dollar figure on this memory and it is a gift from my aunt that I will never forget.