In this article we detail how best to protect your IRA. On June 12, 2014 the United States Supreme Court issued a unanimous decision holding that an inherited IRA passing to a non-spouse beneficiary is not a “retirement fund” and thus does not provide creditor protection. The case focused on Hedi Heffron-Clark, who inherited an IRA worth about $300,000 when her mother died in 2001. In October 2010 Hedi filed for bankruptcy protection. In Clark v. Rameker, the Supreme Court ruled that inherited IRA’s do not enjoy the same protection as traditional IRA’s and are not considered “retirement funds”. Therefore, she could not shield these funds from her creditors.  This decision will have a monumental impact on how the legal and financial communities plan with IRA’s going forward, as individuals who inherit IRA’s are now exposing these assets to their creditors and predators.

The court looked at a three prong test in determining whether an inherited IRA is a retirement fund or not. With respect to an inherited IRA, (1) one can no longer contribute to it, (2) the owner of the inherited IRA must withdraw the funds no matter how far they are from retirement, and (3) the owner of the inherited IRA can withdraw any amount “without penalty” at anytime. Based on these three factors, the Court concluded that an inherited IRA significantly differs from a traditional IRA and is therefore not a “retirement fund”. Thus, it can be invaded by the beneficiaries creditors.

From a nursing home perspective, it is well settled Medicaid law that an IRA is an absolute available resource for either the Medicaid applicant or spouse. Assume you own an IRA worth $100,000, Medicaid says that account must be used to pay for your care. The New Jersey Supreme Court unanimously held that way back in 1998. In Mistrick v Division of Medical Assistance and Health Services, the court held that when calculating an institutionalized spouse’s eligibility for Medicaid benefits to cover nursing home care, a healthy spouse’s IRA must be invaded to pay for the institutionalized spouse’s nursing home costs.

The case involved Sophie Mistrick, who entered a New Jersey nursing home in 1994. At the time of her admission, Joseph Mistrick maintained an IRA account in his name alone worth $150,000, the principal residence, and cash totaling $50,000. The couple began the process of “spending down” their liquid assets of $50,000 in order to qualify for Medicaid. The money in Joseph’s IRA, however, was not spent down, but remained untouched. The court ruled that his IRA was fully available to pay for his wife’s care. Incidentally, had the IRA been converted to an immediate annuity, the entire amount would have been protected.


If a married individual with an IRA dies, the surviving spouse has three options.

(1) Take the IRA and create a new IRA in his/her name;

(2) Roll it over into an existing IRA; or

(3) Leave it in the name of the deceased spouse. A surviving spouse would do this when his/her life expectancy is shorter than that of the deceased spouse. By leaving it in the name of deceased spouse, there is a longer stretch of time to make distributions.

As the Supreme Court made clear, when a non-spouse inherits an IRA, it is no longer a protected asset. Therefore, when a child inherits an IRA from a parent, he or she is required to immediately take distributions based on the child’s life expectancy, not the parents. Since there is a longer stretch involved, the required minimum distribution will be smaller.

The major negative of leaving an IRA to a child is that the child could take the maximum amount in the IRA if he or she wanted. That would trigger a huge income tax. Although the stretch reduces the minimum, it does not prevent the child from taking the maximum. The solution to this issue and to protect it from creditors is to direct the IRA into an INHERITED IRA TRUST.


To protect against the issues outlined above, the solution is for a trust to own the inherited IRA upon the death of the IRA owner. If the trust is a “standard” trust, it must liquidate the IRA within 5 years of the plan owner’s death. If, however, the trust meets the four conditions to qualify it as a “see through” trust, then the IRS will not look at the trust as the owner or beneficiary of the IRA. Instead, it will look through the trust and determine who the beneficiaries are within the trust and use those beneficiaries in the trust as the beneficiaries of the IRA for Required Minimum Distribution (RMD) calculation purposes.

The four criteria are as follows:

1) The trust must be irrevocable as of death;

2) The trust must be valid under state law;

3) The trust must have identifiable human beneficiaries (i.e. no charities since it is a non-human entity and if there is any condition in which the charity could be named as an ultimate beneficiary of the IRA, it triggers the standard trust, and hence the 5 year payout).

4) The trustee must provide a copy of trust to plan administrator or custodian when plan is created and when plan owner is alive.

The trustees of the inherited IRA trust can either accumulate the RMD’s or distribute them to the beneficiaries. In a conduit trust, whatever comes into the trust must go out within the same tax year. Thus, the RMD’s will be paid to the trust (the owner of the IRA) and the trust subsequently passes the RMD’s on to the beneficiaries of the trust. For calculation of taxes, the IRS looks inside the trust to see who the oldest beneficiary in the trust is (the measuring life for RMD’s calculation purposes) but for purposes of distribution the trust pays it to all beneficiaries of the trust. Thus in a conduit trust, the trust distributes the RMD’s to the recipients and they pay the tax, not the trust.

By contrast, there are times when it is best to pay the RMD’s to the trust and not pay it to the beneficiary of the trust. In an accumulation trust setting, if the beneficiary is a spendthrift or on Medicaid, any distribution they receive is potentially lost to creditors. Thus it may be better to accumulate income if beneficiaries are subject to creditors. If so, the Trust now controls what happens with the RMD payment. If the trust retains the RMD’s, it pays the income tax. Although the income tax rates for trusts are more compressed compared to individual rates, most client would rather pay the tax than see the beneficiary’s creditors attach to the RMD’s. In an accumulation trust there is no requirement to accumulate, it is only optional. If a trustee wanted to distribute RMD’s like a conduit trust, he may.


When you die and leave the IRA to either a trust or a non-spouse beneficiary, it is at that point that the stretch for RMD purposes is determined. It is the only stretch you will ever get out of your IRA forever. So make it count. Whether leaving it to kids or a trust, the IRS looks through the trust and sees all the beneficiaries. The measuring life that they will use for RMD purposes is the oldest beneficiary. Why? The older the beneficiary, the shorter the measure life; the quicker the money is removed from IRA and the sooner the IRS gets the tax revenue.

How do you know who the oldest beneficiary is? It depends on who you name. Below is a sample of beneficiary designations and the corresponding measuring life.

Beneficiary Designation                                            Measuring Life

1) “My Estate”                                                                     5 year payout rule

2) “My children”                                                                Oldest child

3) “My trust”                                                                      Oldest beneficiary in trust

4) “The trustee under Article 5 of my trust

f/b/o my children”                                               Oldest Child

5) “1/5 to each trustee of the separate shares

under Article 5 of my trust                                            Each child gets their own separate measuring life


            Using layered planning and combining it with disclaimers provides clients with tremendous flexibility to protect their assets. In fact, no decision must be made with regard to the IRA until 9 months after the plan owner dies, the deadline by which a disclaimer must be filed.

With layered funding the client is provided with the best of both worlds, individual ownership and trust ownership. Suppose the initial beneficiary of the IRA is the trust. Further suppose the initial beneficiary within the trust is a trust set up for a spouse. The spouse would be the measuring life for RMD payout. Remember that you only get one stretch, the age of the spouse. But the spouse can disclaim her right to any IRA proceeds in the spousal trust. Thus, the contingent beneficiary would be the family trust, if established, and we look to see who the oldest beneficiary is in that class, presumably a child. If the trustee of the family trust disclaims, the beneficiary would be the residuary trust.

            Planning with IRA’s is full of pitfalls from an income tax, Medicaid and estate tax perspective. To best protect your IRA and other assets it is critical that you work with an attorney well versed in this area.

Benjamin D. Eckman, Esq. concentrates his practice on Elder Law & Estate Planning. Elder law is intended to broadly assist “extended living”. An elder law practitioner provides the legal information necessary for persons whose lives will extend or have already extended beyond the time when all children are usually out of the house and when regular employment ceases. After the elder law attorney and client complete their work, legal documents have been drafted, tax considerations have been analyzed, and a plan to protect the elder’s estate has been implemented.

Benjamin D. Eckman’s practice focuses on Estate Planning & Elder Law – legal issues facing senior citizens. Benjamin D. Eckman received his Bachelor’s Degree in Business/Accounting from Touro College and his law degree from Seton Hall University School of Law. He is a member of the New York State Bar Association, the New Jersey State Bar Association, the National Academy of Elder Law Attorneys, the Elder Law Section and Real Property, Probate and Trust Section of the New Jersey State Bar Association, the Union County Bar Association, Passaic County Bar Association and the Bergen County Bar Association. He can be reached at (973) 709-0909, (908) 224-4357 or (201) 263-9161.

The Law Firm of Benjamin Eckman provides New Jersey residents with Estate Planning and Elder Law services. Please click here to schedule a complimentary consultation: Book a Call

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