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.