Spouses receive special treatment when inheriting a retirement account such as an IRA (i.e., the ability to roll the account over into the spouse's personal retirement account and the ability to stretch the distributions over the spouse's lifetime), Although this special treatment exists, the retirement account you leave for your spouse can still be seized in a divorce, a lawsuit, or a bankruptcy proceeding.
Three Options Available to Surviving Spouses
When your surviving spouse inherits your IRA, he or she generally has three options:
Cash out the inherited IRA and pay the income tax
Warning! The cashed-out IRA will not have creditor protection and this option accelerates taxation. Once your spouse cashes out the account, he or she may use the money in any way. In addition, if your spouse dies before all the money has been spent, he or she can leave the money to anyone (even a mere acquaintance who was unknown to you).
Maintain the IRA as an inherited IRA
Warning! The inherited IRA will not have creditor protection. However, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a spouse can take the required minimum distributions from this account over his or her lifetime without being held to the ten-year rule, as most other beneficiaries are.
Roll over the inherited IRA and treat it as his or her own
Warning! The spousal rollover may offer some creditor protection but not in all cases. In addition, depending on whom your spouse leaves his or her retirement account to, there is now a larger sum of money to be distributed by the end of the tenth year after your spouse's death, accelerating additional income taxes for the next beneficiary.
Many find it frustrating that a stranger can 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 designed to be the 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;
- lawsuits from car accidents, malpractice, or tenants;
- business failure; and
Want To Know More?
The bottom line is that a properly drafted SRT is often your best option for protecting your retirement accounts after you die. Want to know more? Contact us today to schedule a conversation. We look forward to working with you!