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You Need to Set Up Asset Protection for the Inherited IRA

Asset protection for IRAs is often overlooked. IRA beneficiaries may be exposed to the potential loss of some or all of their inherited IRAs, for many reasons:

Loss of the IRA to lawsuits and creditors. State statutes vary on how much they exempt IRAs from lawsuitsand creditors’ judgments. Recent Rulings on a federal level have deemed IRAs to not be creditor proof.  So in the event of any type of lawsuit the IRA is not protected.

Losing The IRA Due to Divorce. Although inherited property is usually in theory separate and not marital property, beneficiaries can lose this protection by withdrawing the IRA and commingling the funds with marital property (“transmutation”). In addition, even if the inherited IRA is not deemed to be marital property, it definitely is “on the table” when a settlement negotiation takes place, which occurs far more frequently than a full court trial and judge decision. Considering the high incidence of divorce (now over 50 percent in many states), this is a real life threat to the long-term enjoyment of the IRA by the owner’s family.

Spendthrift habits by the beneficiaries.  Needless wasting of the IRA because of the beneficiary’s spendthrift habits (or the spendthrift habits of the beneficiary’s spouse or of some other third party influencing the beneficiary). There is a great temptation to withdraw the IRA immediately because permissible IRA investments typically can be liquidated into cash within a matter of days, whereas other assets inherited outside the IRA, such as real estate, may be more illiquid.

Poor Money Management Skills by the Beneficiary. Even if, at the time of the owner’s death, the account investments were being handled properly by a financial advisor, each of the beneficiaries may simply move their share of the account to another custodian and manage it independently. They also may take the advice of a poorly educated financial advisor. Even a helpful and well-meaning financial advisor can easily make a mistake when re-titling the account after the owner’s death, thereby losing the stretch-out.

There are many more situations that can cause an IRA to be withdrawn early therefore losing the powerful strechout. With this is mind what should an IRA owner do to make sure the IRA is protected from the many land mines that can blow up the IRA?

This can vary greatly depending upon each person’s situation.  Let us know your situation and we can help you develop a plan to protect what may be your family’s most important asset.

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