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Why does the Supreme Court’s recent decision
in Clark v. Rameker, 134 S. Ct. 2242 (2014) –
which resulted in a good deal of disarray in the
estate planning community – bode well for estate
A 2015 study by the Investment Company
Institute revealed that there are more than
$7.6 trillion worth of assets placed in IRAs
nationwide. Although less than 1 percent of
estates nationally are subject to federal estate
tax, more than 80 percent of Americans have
some type of retirement plan. While many
won’t require sophisticated tax planning, almost
all could benefit from counsel to preserve their
assets for the benefit of their beneficiaries.
Retirement accounts of less than $1 million
have long been exempt from claims of creditors
in bankruptcy. Inherited IRA’s, pre-Rameker,
also held this exemption. The Rameker Court
abrogated the long standing protections as
described In re Chilton, 674 F.3d 486 (2012).
It held that bankruptcy protections usually
afforded to an Individual Retirement Account
(the term “IRA” is used collectively herein to
refer to all retirement accounts) do not also
attach to a future beneficiaries interest in
the account once the original account owner
dies—unless that beneficiary is the original
owner’s spouse—with the successor non-spousal
beneficiaries losing these special protections
How can estate planners ensure that their
clients retain the full protections afforded to the
IRA’s original owner for successive beneficiaries?
The answer – despite what many practitioners
currently believe – is to name a specifically
designated trust as the IRA’s beneficiary.
When an attorney is skilled and careful,
a “Stretch IRA Trust” that follows the IRS’
strict rules regarding a trust’s possession of an
IRA can be set up. The beneficiaries of the trust
can retain the IRA, along with the protections
against claims that may arise in a bankruptcy,
divorce and from other creditors in most
Stretch IRA trusts accrue additional value
thanks to compound interest and investment
growth, while deferring the requirement to pay
federal or state income taxes over the lifetime
of the beneficiary. In short, they may protect
people who inherit the IRA from the potential
“triple tax” threat – estate, federal, and state
income tax.
As a planning opportunity, an evaluation
of whether a Stretch IRA Trust is appropriate
should be the new “normal” in the planning
community. Unfortunately, while some estate
planners have expressed concern in naming
a Stretch IRA Trust, others remain oblivious
to the issue at all, and do so at their peril.
Regardless of the outcome on the decisionmaking
process, even many experienced
estate attorneys have reservations on the
beneficiary designation. Outright designation
of beneficiaries could result in a failure of the
beneficiary to exercise the stretch election.
Moreover, clients routinely hinder their
beneficiary’s ability to stretch the IRA by
violating the naming conventions. An attorney
also could unintentionally arrange the IRA
and the beneficiary trust when drafted as a
Revocable Trust in such a way that the trust’s
own beneficiaries are subject to higher taxes and/
or a requirement that the beneficiaries take the
IRA over the course of five years.
The best option may be a separate irrevocable
“see-through” trust, which allows the IRS to
“look through” the trust to see who are named
as the trust’s beneficiaries. The beneficiary’s
name and income will determine the actuarial
life expectancy over which the IRA must be
distributed, as well as calculate the required
minimum distributions (“RMDs”).
When properly drafted and implemented,
the IRS will view the trust as a “see-through”
so long as it meets the requirements laid out in
Treas. Reg. 1.401(a)(9)-4, A-5, namely that: (1)
the trust is valid under state law; (2) the trust
is irrevocable or becomes irrevocable upon
death; (3) the beneficiaries on the trust are
identifiable, and (4) the trustee has provided
the required trust documentation to the IRA
custodian no later than Oct. 31 of the year
following the death of the IRA’s owner.
The Regulations further specify that the
beneficiary of the IRA must be an individual
rather than an entity, such as a business,
estate or charity. When the trust meets
these requirements, and the trust is named
as a beneficiary of the trust, it will be possible
to “stretch” the benefits of the IRA over years
and even – possibly – decades.
The Stretch IRA trust provides a powerful
tool for all individuals, regardless of estate size to
ensure that whatever wealth they’ve accumulated
in a retirement plan passes on and continues
to benefit their family—and not their families’
creditors. The Attorney’s evaluation of the Trust
relevance to their specific client’s needs, design,
and implementation of the Trust provides a new
approach for the attorney to engage with their
client, and allows for better positioning as the
advisor of choice. While the ultimate recipient
of the IRA’s assets may sometime pay the piper,
the careful attorney can ensure that this day is
deferred as long as legally possible.
Jeffrey D. Katz, Esq. is the founder and
managing partner of Bethesda, MD based JDKatz,
P.C., and focuses his practice on innovative tax
and estate planning strategies.
Meghan C. Lentscher, Esq. is an associate at
JDKatz, P.C. in the Estates and Trusts section, and
the former articles editor of the Washington College
of Law, Administrative Law Review.
The information in this column is provided for
discussion purposes and is not intended as legal advice