Creditor Protection Benefit of the Stand Alone IRA Beneficiary Trust

In a recent bankruptcy court decision out of the Eastern District of Texas (In re: Chilton) the court found that an inherited IRA is not the equivalent to an IRA for purposes of determining whether the account contains “retirement funds” that may be exempted from the bankruptcy estate under U.S.C. §522(d)(12).

Courts have listed several reasons for distinguishing an inherited IRA from an IRA which allows the creditors to reach the inherited IRA assets:

• The state exemption was for retirement benefits to be available to the retired person, not a child who was still earning a living;
  
• The beneficiary of an inherited IRA has an unrestricted right to withdrawal of the IRA at any time without any penalties;
  
• And, the IRA is significantly different than an inherited IRA under the Internal Revenue Code.

The Chilton case highlights the dangers of relying on the bankruptcy code to provide protection for an inherited retirement accounts. To obtain solid asset protection we recommend that retirement plans be payable to a Stand Alone IRA Beneficiary Trust that is drafted to qualify as a designated beneficiary under Internal Revenue Code Section 401(a)(9) and that contains spendthrift language. The incremental cost of creating a Stand Alone IRA beneficiary trust is more than offset by the benefit of protecting the inherited IRA assets during the lifetime of the beneficiary from creditors, predators and spouses.