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Creditor Protection for IRAs and Beneficiaries: Keep This Estate Planning Tip in Mind

December 12, 2016

Filed under: Asset Protection Planning — Neel Shah @ 9:15 am

An individual retirement account offers significant tax-deferred savings as a savings vehicle. Unfortunately, many people don’t realize that tax deferral is not the only benefit than an IRA offers. Another potential benefit is creditor protection in the event that a person has to file bankruptcy. This raises the question, however, of whether or not beneficiaries are protected if the person owning the IRA passes away. 

Investors must think carefully about how their assets should be protected in the event of lawsuits or bankruptcy. This process is known as asset protection planning. In recent years the Supreme Court has helped to provide clarity on these issues. 401(k)s and Social Security benefits as well as pensions have some protection from creditors in bankruptcy proceedings and IRAs do as well. This means that your IRA assets are typically safeguarded and cannot be ceased by a creditor if you choose to file a bankruptcy.

Be aware, however, that this protection does not extend to other types of civil lawsuits, IRS levies or judgements. Your assets may also be protected from creditors based on your state law but bear in mind that these rules vary based on your location. Assets that have been rolled over to an IRA from a qualified plan may not be subject to full protection and the same dollar limits. Consulting with a knowledgeable asset protection planning attorney is strongly recommended so that you can craft a plan most in line with your individual needs and the risks you want to guard against.  Proper asset protecting planning takes place well in advance of a crisis event.

 

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