Protecting Inherited Retirement Plans
In order to help a debtor obtain a fresh start, federal law allows debtors to exempt retirement accounts from the bankruptcy estate.
In today’s estate planning environment, we find that a client’s most valuable assets will often consist of one or more retirement plan accounts, including 401(k) and IRA accounts. Besides serving as tax-deferred vehicles for investment for retirement, another useful feature of these accounts is that they are generally protected from a person’s bankruptcy creditors. In order to help a debtor “obtain a fresh start”, federal law allows debtors to exempt retirement accounts from the bankruptcy estate.
Until recently, it was unclear whether an IRA that passed down to beneficiaries after the account holder’s death was exempt from the creditors of the beneficiary. Unfortunately, the United States Supreme Court, in the case of Clark v. Rameker, determined that these so called “inherited” IRAs are not protected from the creditors of the beneficiary after the account holder’s death, ruling that these inherited IRAs did not fall within the definition of “retirement funds”. So, for example, if you maintain an IRA and declare bankruptcy, the IRA assets will not be subject to attachment by your creditors. However, if you name you child as the beneficiary of the IRA, and, after your death, the child declares bankruptcy, the IRA is not protected from the creditors of the child.
Fortunately, all is not lost. With proper planning, inherited IRAs can be protected from a beneficiary’s creditors, particularly by incorporating a revocable trust into your estate plan. Instead of naming children or other family members as the beneficiaries of retirement plan accounts, you can name a revocable trust as the beneficiary. After your death, the trust would become the owner of the inherited IRA. Since the child would not own the assets directly, the inherited IRA would not be subject to the claims of the child’s creditors.
Often times clients overlook the potential creditor protection afforded by a revocable trust, opting instead for the “easier” approach of naming their children directly as beneficiaries of their IRAs. Note, however, that the revocable trust can include provisions that allow the Trustees to make distributions to or for the benefit of the child in whatever way the Trustees see fit, and each child can be given great latitude with respect to the identity of the Trustees. In light of the creditor protection and flexibility inherent in revocable trusts, we strongly encourage you to speak with us to determine whether it would be advisable to name your revocable trust as the beneficiary of your retirement plan benefits.
Health Care Decision Making
Designating someone to make medical decisions for you, if needed, is one of the most basic, and important, steps in the estate planning process. If you have not properly designated someone to act for you and become incapacitated, then a legal guardian may need to be appointed.
You should name both a primary and an alternate health care agent. You should name someone who knows your wishes, will honor them, and have the ability to handle what can often be hard and emotionally charged decisions.
You can generally name only one agent to act at a time, but you can make known your wishes if you want your agent to speak with other loved ones before making decisions. If you want to allow more than one person to have access to your medical information you may want to sign additional consent forms and HIPAA authorizations.
You should provide a copy of your health care proxy to each person you name in the document as well as to your primary care physician.
Individuals often create living wills in conjunction with a health care proxy. A living will is a general statement of one’s desire to not be kept alive by artificial means if there is no reasonable expectation of recovery from a medical condition. In Massachusetts, you can also sign a Medical Orders for Life-Sustaining Treatment (MOLST) form. You typically work with your doctor to fill out the form, and it is much more specific about what kind of care you would and would not want provided under various scenarios.
The most important action you can take to ensure your wishes will be honored is to talk with your family. Neither a living will nor a MOLST form can or should take the place of a conversation with your loved ones and those you name to act in your health care proxy.