Beware: Creditors can Inherit from You, Unless…

Most people do not know that a retirement account that you leave to a child, grandchild, or other beneficiary is accessible by creditors. If your loved one receives an inheritance from you in the form of an inherited IRA or 401(k), they will not have the same protections that you did from bankruptcy, lawsuits, or creditors. What can you do?

Here are Three Choices for your Surviving Spouse:

When it is time for your surviving spouse to make a choice about the retirement accounts they inherit from you, these are the options:

  1. They can take the cash. They can forget about tax planning or creditor protection and just cash everything out. This does not give creditor protection and it can result in a big tax bill if the retirement accounts are sizable. This is typically not the right answer.

  2. They can keep the IRA as an inherited IRA. This will allow the taxes to continue to be deferred, but as stated above, inherited IRAs do not have creditor protection. For instance, if your surviving spouse were to be in a car accident and have a lawsuit, this money would be subject to that lawsuit.

  3. They can take a spousal rollover of the account. This helps continue to defer taxes and it can offer some creditor protection, but not in all circumstances.

What are the Choices for Other Loved Ones

Since spousal rollover is not available to anyone other than a surviving spouse, the only options available to a non-spouse loved one are (1) take the cash OR (2) receive the accounts as inherited IRAs.

How Can an Estate Planning Attorney Help?

It is frustrating to many people that they work all their lives to provide for themselves, their spouses, and their loved ones and know that one false move behind the wheel or one slip and fall on their property can quickly take away all that hard work. Those that are frustrated with this reality can set their loved ones up for success by creating a Stand-Alone retirement trust. A Stand-Alone Retirement Trust allows you to protect your assets for your beneficiary’s in many ways. A Stand-Alone Retirement Trust can protect from

  • Second marriages

  • Divorce

  • Lawsuits from car accidents, slip and falls, malpractice, etc.

  • Business failure

  • Bankruptcy

  • Medi-Cal Qualification

If you are worried about a sizable qualified fund account being inherited by your loved one’s exes and creditors, give us a call at (951)304-3431.

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