- On April 8, 2016
Protecting Inherited Retirement Assets From Creditors and Preserving A Powerful Income Tax Deferral Savings Opportunity
Why consider protecting your 401(k), IRA or other retirement assets?
Unfortunately, many parents and other retirement plan owners receive poor advice from their advisors to “simply” name children or other persons as outright beneficiaries of IRAs, 401(k)s or other retirement plans (hereinafter “retirement plan”). The common result is retirement plan beneficiaries losing fundamental creditor protections, suffering from accelerated income taxation and losing millions of dollars in potential income tax deferral savings (even with smaller to moderate sized retirement plans). So, the “simple” answer is not always the “right” answer.
What are common problem scenarios of naming outright beneficiaries of retirement plans?
Much to the surprise of many clients and their advisors, under Illinois and federal bankruptcy laws, IRAs a child receives from a deceased parent are generally unprotected from the child’s creditors. For example, if a parent dies leaving a retirement plan outright to a child, and the child subsequently loses in a lawsuit, the retirement plan’s current and tax deferred (“Stretch-Out”) value can be lost to the child’s creditors. Another significant problem is outright beneficiaries making poor financial decisions by voluntarily cashing-out inherited retirement plans thereby accelerating income taxation and losing the incredible “Stretch-Out” income tax deferral opportunity. Even with smaller to moderate retirement plans, the “Stretch-Out” can be worth millions of dollars. So, protecting retirement plans from both involuntary events (i.e., lawsuits and creditor attacks) and voluntary mistakes (i.e., bad beneficiary financial decisions and spending habits) is the “best” path.
How can inherited retirement plans and the “Stretch-Out” be protected?
The “best” answer is Retirement Benefit Trust planning. For more information, please call Kelleher & Buckley, LLC at (847) 382-913.