Why Naming Your Kids as a Beneficiary of Your IRA Is Not Advisable
Many people in Kansas labor under the misconception that they do not have to be concerned about their IRA because of special protections incorporated in Kansas statutes. This false sense of security is based on a basic misunderstanding of state law. Although our state does provide statutory protections for IRAs, these protections for inherited IRAs is only available to those who meet the qualifications to be considered a Kansas resident when they pass away. If you make a properly crafted trust the beneficiary of your IRA, however, this strategy can shield the assets in your trust from the creditors of the family or loved ones you name as beneficiaries. If you name your kids as the beneficiary of your IRA, you are taking a serious risk.
The U.S. Supreme Court in Clark v. Remeker ruled that children or other individuals who are not a spouse of the decedent can face a risk of having an IRA that would be inherited exposed to enforcement by the creditors of the beneficiary. The 9-0 decision clarified the rule that an IRA that is inherited might not be protected from the creditors of its owners. Although a spouse is in a special position because the spouse can use a rollover IRA, this protection provides no solution for an individual without a surviving spouse or a surviving spouse who requires long-term care.
The stretch out provisions of an IRA that is inherited with the trust as a beneficiary can be maintained if the trust is a qualified beneficiary. The following conditions must be met for a trust to be a qualified pass thru beneficiary:
There must be identifiable “human” beneficiaries of the trust.
The plan administrator must be provided with a plan document.
The trust needs to be valid under the law of the state.
The form of the trust must be irrevocable after the death of the party who creates the trust.
When designating a trust as the beneficiary of your IRA or similar retirement account, it is essential to strictly comply with these requirements. When a surviving spouse continues the decedent’s IRA status and withdraws funds over the anticipated life expectancy of the decedent, the funds are not protected as either a new IRA or a rollover IRA.
If an individual names his or her kids as beneficiaries of his IRA, this is an understandable mistake, especially if the IRA owner is unmarried. This is just one type of estate planning trap that an experienced Wichita estate planning attorney can help you avoid. A properly constructed trust can provide asset protection for both the settlor and beneficiaries of the trust. Our estate planning law firm can assist you in maximizing the legacy that you pass to your loved ones.
If you have questions about estate planning or asset protection, we welcome the opportunity to talk to you and answer your questions. We invite you to call the Weber Law Office or to submit an inquiry form through this website to schedule your initial consultation our Wichita estate planning lawyer.