Does an inherited IRA have the same protection as a regular IRA under Federal Law? – Los Angeles Income Tax Planning & Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on June 24, 2014

For many years it has been unclear whether an inherited IRA has the same protection (a $1,000,000 exclusion) as a regular IRA under Federal law. In Clark v. Rameker, the Bankruptcy Court had determined that an inherited IRA does not share the same characteristics as a traditional IRA and disallowed the exemption. The District Court reversed, explaining that the exemption covers any account in which the funds were originally accumulated for retirement purposes. The Seventh Circuit disagreed and reversed the District Court, denying the exemption. On June 12, 2014, the U.S. Supreme Court affirmed, in an opinion by Justice Sotomayor, the Appeals Court's decision denying the exemption.

As a result, if this is a concern for you, please talk to us about leaving your IRA assets to your heirs in an IRA Trust. The IRA Trust is completely revocable while you are alive. It is especially useful in second marriage situations. It is designed to provide your heirs protection from future ex-spouses, business creditors and their own problems with handling money. Also, an IRA Trust is a way to allow the assets to accumulate in the most tax efficient fashion - the so-called stretch-out. Consider this example:

Father is 65, Son is 40, and Grandchild is 10. Father has $500,000 in his IRA which he does not need. He has also adequately provided for Son. If Father is the IRA beneficiary his first required distribution is 2.29% of the IRA balance of $11,250 ($100 divided by his 43.6 year life expectancy = 2.29%). If Grandchild is the beneficiary the required distribution is $6,850 (100 divided by 72.8 years). As a result of that difference the cumulative distributions using Father's life expectancy compared to Grandchild's is $2,910,456 versus $9,224,336.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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