the US Supreme Court VS the IRA You're Leaving To Loved Ones | SDITalk.com #234 - a podcast by Bryan Ellis - SelfDirected.org

Ruth Heffron did everything right – she built up an IRA big enough for her retirement, AND enough to leave her daughter nearly half a million dollars.  But the US Supreme Court has different ideas, and it’s bad for Ruth, her daughter, and YOU.  I’m Bryan Ellis.  This is Episode #234.

-----

Hello, SDI Nation!  Welcome back to Self Directed Investor Talk… the show where I, your humble host, daily throw myself into the lion’s den in proclamation of the Gospel of Self Directed Investing… namely, that you MUST DECLARE INDEPENDENCE FROM WALL STREET and take control of your own capital!

Before we do that… can I just remind you guys about Fund & Grow?  They’re the guys that are just EXTRAORDINARY when it comes to build cash credit for investors, businesspeople and others.  For anyone with decent credit, their specialty is establishing $50,000 to $250,000 or more of ZERO INTEREST credit for you to use on anything you want.  Totally unsecured, too… It’s really amazing.  A great alternative to hard money loans, for example.  Check them out if you need capital.  I endorse them very proudly.  You can reach them at SDITalk.com/credit. 

Ok, let’s jump in.  To participate in the conversation, reach out to us on Facebook or Twitter, or by email at feedback at sditalk.com.

Ruth Heffron must be spinning in her grave.  She opened an IRA and build it up such that, even after using it herself, there was still nearly half a million dollars in there when she passed away.  Mrs. Heffron did what may of us would do in that case… she designated her only child Heidi Heffron-Clark as her beneficiary.

For a while, things were fine.  Heidi was able to withdraw a bit of that money over time, such that she drew it down to a value of about $300,000.  But then something unfortunate happened.  Heidi found herself facing some financial difficulty, and chose to declare bankruptcy.

Now if you’re wondering why Heidi would declare bankruptcy since she had an IRA worth $300,000… well, you’re on the right track.  When one declares bankruptcy, their assets are basically up for grabs by creditors… and so that $300,000 IRA she inherited from dear old mom would seem to be on the chopping block.

Alas… Heidi – or more likely, her bankruptcy attorney – knew that there’s some very special statutory protection for retirement accounts.  With only a few exceptions, IRA’s and other retirement accounts are basically outside of the reach of creditors, even in the case of bankruptcy.  It’s one of the things that makes that type of account truly special… something like a fortress for your financial assets.

So, armed with this assurance, Heidi Heffron-Clark filed for bankruptcy.  But then something wholly unexpected happened:  Her creditors fought back.  They claimed that those protections against creditors available to retirement accounts are available ONLY to retirement accounts… and since Heidi had INHERITED her IRA, and had been using it to pay her life expenses, then that account was arguably NOT a retirement account, and thus no longer entitled to the protections provided by law.

And, lo and behold, when those creditors made these arguments before the US bankruptcy court, the court agreed, and Heidi had lost her $300,000 IRA.  Then the appeals came… she won some, she lost some… you know the drill, until one day, Heidi and the case of her $300,000 IRA land before the U.S. Supreme Court.

And when the judgment on that case was handed down, something unusual happened:  There was a unanimous decision AGAINST Heidi’s claim.  Indeed, the U.S. Supreme Court had decided that by virtue of having INHERITED the account, Heidi’s IRA was no longer actually a retirement account, but was, essentially, a normal financial account, available to satisfy the demands of creditors like any other asset.

Let’s put aside for a moment whether we agree with that decision.  The fact that it was unanimous – which is a rarity at the Supreme Court – suggests that the law is settled, whether we like it or not.

But that raises the question:  How can you make sure that your beneficiaries ACTUALLY receive the money you’re leaving for them, since this IRA protection is no longer available?

And respectfully, my friends, don’t do yourself the disservice of thinking this isn’t relevant for your loved ones.  You might have adult children who are extremely well established financially, and who you can’t imagine would ever declare bankruptcy.  But the issue is broader than that.  I submit for your consideration two additional considerations:

Scenario #1 happens when someone – anyone – is attacked by an unexpected lawsuit.  It could be a car accident that you didn’t intend to cause, but that is nevertheless your fault.  It could be some unforeseen business issue.  No matter… if your beneficiary is targeted by and the victim of a money judgement, then whatever you leave to them in an IRA will be at risk.

And scenario #2 is the all-too-common instance of divorce.  You leave your IRA to your child, and after you’ve passed on, there’s an ugly divorce… and your IRA will be fair game in that proceeding, even though you left it to your CHILD or GRANDCHILD or whoever… and not to their spouse.  That’s just the way it usually works out.

So this is a real issue for everyone… not just those of you who have future beneficiaries who are currently showing signs of financial distress.

So, what do you do?

Well, step 1 – mandatory for everybody – is talk to a competent attorney about this issue.  I, of course, recommend THE GREAT ONE, Tim Berry who you can reach at SDITalk.com/tim.  But no matter who you choose, you MUST work with an attorney who has very specific expertise in BOTH retirement plan law AND in asset protection law, because this issue represents a collision of those two complex areas.

The solution for MOST people will be one or both of these strategies:

#1:  Put a TRUST between your IRA and your future beneficiaries.  I know that Tim Berry is particularly fond of using something called a Charitable Remainder Trust for even greater tax benefits.  Maybe I’ll have him on the show soon to discuss that.

And strategy #2 is to structure the assets INSIDE of your IRA in some sort of asset-protected manner.  This is actually a rather ninja-level strategy, but the basic idea is to structure the assets inside of your IRA such that they are very valuable to you, but practically worthless to anyone else.  There again, I think I’ll have Tim come on and talk with me someday soon about this.

There is one bit of good news though.  Since this Supreme Court ruling came down, several STATES have begun implementing specific protections for inherited IRA’s.  That’s not as good as protection by federal law, but it’s certainly a formidable barrier between the IRA you’ve worked so hard to build and the creditors who would like to take it from you or your loved ones.

That’s all I’ve got for you, except this:  Please, tell your friends about this show… Several ways to listen… on radio via the Wall Street Business Network, on iTunes or of course at SDITalk.com.  I’d appreciate it so much!  Any my friends, invest wisely today, and live well forever!

 

---

Hosted on Acast. See acast.com/privacy for more information.

Further episodes of Self Directed Investor Talk: Alternative Asset Investing through Self-Directed IRA's & Solo 401k's

Further podcasts by Bryan Ellis - SelfDirected.org

Website of Bryan Ellis - SelfDirected.org