Most people are aware that a retirement account is exempt from the claims of the participant’s creditors. A recent case examined the issue of whether this same exemption from creditor claims applies to the beneficiary of the retirement account.
This recent case addressed the situation where a father named his son as the beneficiary of his retirement account. Upon father’s death, the son elected to transfer the funds into an “inherited IRA”. Under the terms of the inherited IRA, son was required to take annual minimum distributions. He was also permitted to take additional payments at his discretion, without penalty.
Shortly after inheriting the IRA, a creditor obtained a large judgment against the son. When the judgment was not paid, the creditor attempted to garnish the funds in the son’s inherited IRA. Son objected, arguing that the inherited IRA account was not subject to the claims of his creditors.
There is little question that, under Florida law, an IRA account would not be subject to claims by the father’s creditors. This reflects a clear legislative policy to protect retirement funds accumulated for retirement by a participant. At issue was whether the same creditor protection extends to the beneficiary of a retirement account.
In the recent case referred to above, the Court found that inherited IRA’s are not vehicles to preserve money for a participant’s retirement. Instead inherited IRA’s are liquid assets that a beneficiary may access at any time without penalty and without regard to retirement needs. As such, the legislative protection afforded to participants in a retirement account does not extend to the beneficiaries of an inherited retirement account.
This case has significant implications for anyone who has accumulated a substantial amount of funds in a retirement account. It clearly indicates that the naming of individuals as beneficiaries of the account, such as a beneficiary designation which states “my children in equal shares” or the equivalent, will not provide creditor protection against the child’s creditors.
A far wiser course of action would be to provide that each child’s share of the retirement assets should be paid into a trust for the benefit of that child. The terms of the trust could then provide for creditor protection against each child’s creditors. It should be pointed out that there are a number of complicated rules which apply to the designation of a trust as the beneficiary of a retirement account. It is highly recommended that one obtain professional advice before naming a trust as the beneficiary of a retirement account.