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Under Maryland law, retirement accounts (IRAs, 401(k)s, 403Bs, etc.) are exempt from the claims of creditors.  However, the 7th US Circuit Court (Maryland is in the 4th Circuit) has recently declared that Inherited IRAs do not enjoy the same protections.  While Maryland is not subject to the court precedents of the 7th Circuit, the decision was rendered in the federal bankruptcy court and many judicial trends travel laterally across the circuits through the channel of the Bankruptcy Court.

An Inherited IRA is one which has passed from the original owner to a non-spouse beneficiary (usually a child, etc.).  When a spouse is the beneficiary of an IRA, the account is said to ‘roll over’ to the spouse-beneficiary, who then takes ownership of the account in their own right and title.  A non-spouse beneficiary is said to ‘inherit’ the retirement account with the title to the account being changed to “[Original owner] IRA fbo (for the benefit of) [non-spouse beneficiary]”.  The difference in these two types of accounts affects how Required Minimum Distributions (RMDs) are calculated and, now, also affects the previously assumed asset protection value of retirement accounts.

Use of a Standalone Retirement Trust (“SRT”) can remove the risk and uncertainty of whether assets in an inherited IRA will be subject to the claims of creditors.  Such a trust is crafted to either accumulate and protect IRA distributions for the beneficiary or to allow all distributions to pass through a ‘conduit’ to the beneficiary; they are known as either Accumulation SRTs or Conduit SRTs.  In fact, a Conduit SRT can also be drafted to include a trigger which, upon the appearance of creditors, converts to an Accumulation SRT.  In both types of SRTs, it is important for the owner of the retirement account to establish the trust early on so that all of the necessary beneficiary designations can be put in place and the independent trustees identified.

An SRT is yet one more means of constructing a family’s asset protection framework for the next generation’s inheritance.  Creating a legacy isn’t impossible, but it does take time.