Spouses receive special treatment when inheriting a retirement account. This includes the ability to roll over an IRA into a personal retirement account. Also, it stretches distributions over their lifetime. However, leaving a retirement account to your spouse may backfire. For example, the court could seize it in a divorce. What’s more, a lawsuit, or a bankruptcy proceeding could affect it. Don’t leave your inheritance to creditors.
Options for Surviving Spouses
A surviving spouse who inherits an IRA exercises three options:
- First, cash out the inherited IRA and pay income tax.
First, a cashed-out IRA does not offer creditor protection. Also, it accelerates taxation. Once your spouse cashes out the account, he or she may freely spend the money. What’s more, a spouse who dies before spending all of the money can leave the money to anyone. - Next, maintain the IRA as an inherited IRA
In such a case, the inherited IRA would not provide creditor protection. However, this changes under the Setting Every Community Up for Retirement Enhancement (SECURE) Act. For example, the spouse can withdraw required minimum distributions. In fact, they can do this over the course of their lifetime without the ten-year rule. - Finally, roll over the inherited IRA and treat it as his or her own.
The spousal rollover offers creditor protection in some cases. In addition, things change depending on the named beneficiary. You could leave an inheritance for distribution by the end of the tenth year after death. This accelerates additional income taxes for the next beneficiary.
Many feel frustrated because strangers could swoop in and take their hard-earned money. Fortunately, there is a solution: a properly drafted standalone retirement trust (SRT).
Properly Drafted Standalone Retirement Trusts Can Provide Creditor Protection
An SRT is a special type of trust. It designates the intended beneficiary of your retirement accounts after you die. It can protect your retirement account funds from your beneficiary’s creditors. In fact, we can include trust provisions that specifically protect your spouse in situations such as second marriages; divorce; lawsuits from car accidents, malpractice, or tenants; business failure; and bankruptcy.
Want To Know More?
The bottom line? A properly drafted SRT is often the easiest way to protect a retirement accounts after death. Want to know more? Contact us today. We look forward to working with you.
About Skvarna Law in Glendora and Upland, California
Skvarna Law Firm operates offices in Glendora and Upland, California. We provide legal services. We cover San Bernardino, Los Angeles, Orange, and Riverside Counties. This includes several cities. Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Pomona, La Verne, Montclair, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma.
