Inherited IRAs not Protected

David A. Holmes, Attorney
David’s practice focuses on asset protection, corporate and business law, civil litigation with an emphasis in contract, commercial and construction disputes, and real estate.

Many clients accumulate significant balances inside of 401k and other qualified retirement vehicles during their working years. After retirement, those plan balances are often rolled into IRA accounts.  In many cases IRA accounts are subsequently inherited by other family members after the client passes away.  Florida’s statutes have long provided an exemption for retirement plan balances from creditor’s claims, and Florida courts have consistently applied that exemption to IRA accounts.  Most clients therefore assume that retirement plan balances will be exempt from creditor claims during the client’s life and after the IRA is inherited by children or other beneficiaries.

In a landmark decision, a Florida appellate court recently held that the statutory exemption does not extend to beneficiaries who inherit an IRA account. Under this decision, a so called “Inherited IRA” is now subject to the claims of the IRA beneficiary’s creditors.

Fortunately, there are planning options. A trust can be named as IRA beneficiary, with children and other family members named as beneficiaries of the trust.  Among the many benefits of an IRA trust:

1. Protection of IRA balances from beneficiaries’ creditors after the trust settlor passes away.
2. Limiting required minimum distributions from the IRA based upon the age and life expectancy of the beneficiaries;
3. Preventing beneficiaries from liquidating the IRA account upon inheritance, which can expose the IRA funds to significant tax and the loss of future tax deferred appreciation.