Gavel to Gavel: Inherited IRAs at risk

November 2014

The Journal Record

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Millions of people have billions of dollars in IRA accounts in the United States. For many, their IRAs are a large part of their taxable estate.

About half of the states (including Oklahoma, 31 O.S. §1, Sec. 20) protect IRAs from creditors. In 2005, the U.S. Supreme Court extended creditor protection to IRAs of debtors in bankruptcy who did not have state protections available to them (Rousey v. Jacoway 544 U.S. 320).

“When I’m gone, I want my children to enjoy what I’ve saved up in my IRA” is not an unusual planning objective.

Clients now need to consider a U.S. Supreme Court case issued July 14 (Clark v. Rameker), ruling that inherited IRAs are not creditor-exempt.

The Rameker court considered that an inherited IRA account no longer has a so-called retirement purpose, but is simply a value transfer to beneficiaries. Oklahoma has not yet adopted the policy logic of Rameker, but that logic is compelling.

But if the rule of Rameker is adopted by Oklahoma for inherited IRAs, would it apply to a surviving spouse as designated beneficiary? A surviving spouse as IRA beneficiary can roll the IRA into her own name, with the result that the spouse is considered the owner of the IRA, not simply a beneficiary of the decedent’s IRA. So the policy concerns of the court in Rameker should not apply in that case.

Here’s the problem for surviving spouses: Oklahoma law (43 O.S. §209.1) holds a surviving spouse personally liable to pay the decedent’s medical bills. Even the statutory protection of a surviving spouse’s personal property allowance at 58 O.S. 312, which gives the spouse “all (of the decedent’s) personal property or money as is exempt by law from levy and sale on execution or other final process from any court,” has this fatal exception: “except, when there are no assets thereunto available, for the payment of the necessary expenses of his last illness, funeral charges and expenses of administration.”

So, if Oklahoma does adopt the Rameker rationale – and best drafting practices may be to assume it will – then estate planning lawyers will have but one drafting option for protecting inherited IRAs from beneficiaries’ creditors. That would be to designate a properly drafted spendthrift trust as the IRA beneficiary.

Phil Feist is a trust and estate planning attorney with Fellers Snider.

This article appeared in the November 12, 2014 issue of The Journal Record. It is reproduced with permission from the publisher.© The Journal Record Publishing Co