Trusts can be used for inherited IRA creditor protection.
In 2014, the Supreme Court ruled that non-spousal inherited IRAs do not quality as creditor-protected retirement assets, generating renewed interest in how to properly structure the IRA as a wealth transfer vehicle. This will likely prompt many clients to look to trust vehicles as IRA beneficiaries in 2015 and beyond in order to shield any inherited IRA assets from a beneficiary’s creditors. However, if IRA proceeds pass to a trust beneficiary that does not qualify as a see-through trust, the IRS prohibits the “stretch” treatment that would allow an individual designated beneficiary to take distributions from the inherited IRA based on his or her life expectancy. Instead, the non-qualifying trust is required to exhaust the account assets over a five-year period or the original owner’s life expectancy.
Trusts that do qualify as see-through trusts, however, are permitted to stretch IRA distributions over the life expectancy of the oldest trust beneficiary. In order to qualify as a see-through trust, the trust must satisfy the four basic requirements: the trust must be valid under state law, the trust must be irrevocable (or must become irrevocable upon the death of the IRA owner), the trust beneficiaries must be identifiable as of the date of the IRA owner’s death, and a copy of the trust must be provided to the IRA custodian by October 31 of the year after the IRA owner’s year of death.