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Are Inherited IRAs Protected From Creditors?

When you pass down your assets to your friends and loved ones, you probably want to make sure that they can actually keep them. You don’t want them going to creditors instead. Unfortunately, some assets are not always protected from bankruptcy proceedings, and that can include funds from inherited IRAs. If you plan to pass down a retirement account, you may want to talk to a Des Moines estate planning lawyer about the best way to do that.

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When Can Inherited IRAs Be Protected From Creditors?

You don’t lose everything when you go through the bankruptcy process. A surprising number of assets can be “exempt,” meaning that they won’t be sold off or seized to pay off creditors. Retirement funds, like those found in an IRA, are often exempt, for example.

However, this protection only applies to your own retirement account. When people pass away and pass down their retirement funds, those inherited IRAs rarely have the same protections. This means that if your beneficiary goes through bankruptcy, creditors may be able to take the money from that inherited account.

There is one exception to this. If inherited IRAs are passed down to spouses, they retain some of their protections. Anyone else could have their inherited retirement account cleared out after filing for bankruptcy though.

Can Trusts Protect the Funds in Inherited IRAs?

Fortunately, you do not have to put up with this kind of risk. Instead of having inherited IRAs passed down to a person, people with retirement funds to pass on can decide to make a trust and let it inherit the IRA. You will still be able to distribute funds to your beneficiaries of choice, but no creditors can come after the trust.

This can be an especially wise choice if you know that your beneficiary is not the best with money. You don’t just protect inherited IRAs from creditors this way. You can also set other terms about the trust and how money is distributed. That can be a good thing for some beneficiaries.

Do I Need a Lawyer to Set Up a Trust?

Setting up a trust on your own is not recommended. An estate planning lawyer can make the job easy though. They can set up a trust that inherits retirement funds for you and they can do it on your terms. If there are any other estate planning tools that you can take advantage of, we would be happy to tell you about those as well. Don’t let creditors or other entities take your assets when they could instead be passed on to friends and loved ones.

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If you’re trying to find the best way to preserve your assets for beneficiaries, contact Herting Law, PLLC. We can schedule you a consultation with an experienced estate planning attorney who can help you provide for your loved ones after you are gone.

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