IRA or individual rip-off account?
I was calling my CPA clients the other day to share with them the importance of communicating the Supreme Court’s recent decision on inherited IRAs when I was reminded of a story: the accountant who read a nursery rhyme “Little Bo Peep” to his granddaughter. After finishing, he noted that Little Bo Peep’s loss was not deductible but reminded the little girl how much he liked her proactive thinking.
Inherited IRA beneficiaries should be blessed as warmly, as the U.S. Supreme Court ruled last week that certain money inherited from individual retirement accounts can be taken by creditors to cover the debts of people in bankruptcy proceedings. Since Ed Slott, CPA has indicated that titling and beneficiary designations are one of the biggest mistakes made with IRA accounts, it’s time for all of us as consumers to review where our IRA proceeds came from and the beneficiary complications that may arise in our existing designations that have not been changed in eons.
The court said recently that inherited IRA money not received from a spouse is not protected in bankruptcy proceedings. In the past, IRAs have provided an incentive to save by protecting all account holders and their beneficiaries. The justices determined that since traditional IRAs have significant spending restrictions that inherited IRAs do not, the funds should not be protected from creditors. With the recent talk about limiting the flexibility of required minimum distributions (RMD) on Roth IRAs, it appears that the courts and Treasury continue to find ways to increase potential revenue from retirement accounts, the lifeblood of America’s retirement system.
In the 1990s, the Clinton administration even went so far as to propose a one-time surcharge on all retirement savings to curb the deficit. That would have been tantamount to double and even triple taxation but was considered according to former Treasury Secretary Robert Rubin. The ruling only applies to inherited IRAs, but the court seemed to feel that the use of retirement proceeds to buy a vacation home or sports car immediately after a bankruptcy proceeding was complete went a little too far.
Since IRA owners are passing wealth on as they desire, should a non-spouse receive a less than fair legal status than a spouse? This becomes a huge issue when one considers the billions of dollars of unspent IRA money that baby boomers will leave behind. The case involved a Wisconsin couple that argued that the IRA funds were off limits to creditors after their pizza business closed in 2009. One terrific planning tool that IRA inheritors and beneficiary designators can use is the family discussion. This tool is available and provides talking points on the location of key financial documents, computer passwords and retirement designations. This tool, which has been featured in national publications over the years, is a great supplement to the heritage planning resource from mutual fund company MFS, as well as the beneficiary handbook. In addition, the family discussion can be used to gauge the capability of a portfolio to create a pension like lifetime income or the risk of a long-term care catastrophe.
Every couple that has a retirement account should review this critical tool and should have a frank discussion with all beneficiary designees to secure the objective and intent of all proceeds that are passed on.