Atlanta Trust Lawyer: How to Protect Inherited IRAs From Future Bankruptcy 

Atlanta Trust Lawyer: How to Protect Inherited IRAs From Future Bankruptcy 

retirement pig

Atlanta trust lawyers are abuzz following a recent US Supreme Court decision that will have big implications for clients.  The fact that these professionals keep up-to-date on legislation and court decisions that affect their clients is one of the most important reasons not only to hire an estate planning lawyer in the first place, but also to check in with the attorney at least annually to see if any changes need to be made to a previous plan in light of new information.

While a person’s own IRA can be protected in the case of bankruptcy, the court has determined that an inherited IRA cannot.  While that is big news for those who have already inherited an IRA, it is a call to action for those planning to leave one behind.  Being aware of the consequences of the Court’s decision can drastically change the approach to planning in order to protect heirs from this new development.

It is common for estate planning lawyers in Atlanta to see clients who have much of their wealth in the form of an IRA or 401(k).  During the planning process, they determine how that money should be used after their death.  It often makes up a large part of the estate they intend to leave behind.  As of recently, this was commonly done by placing it into a Revocable Living Trust.  Now, however, if the heir declares bankruptcy, that money can be taken away.

A Real-Life Example of Savings and Loss

The possibility of losing an inherited retirement account in this manner is more common than you might expect.  Take for example the case of Joan and Robert.  Robert worked hard to save for retirement, accumulating $450,000 in his 401(k).  Unfortunately he was also diagnosed with a serious medical condition and accumulated over $300,000 in medical debt before he passed away.

After his death, his wife transferred the funds of the retirement account into an “inherited” IRA so that she could access the money without having to pay a 10% penalty before age 59 ½ .  That money was her lifeline.

However, the medical bills spiraled out of control and were eventually turned over to a collection agency.  Unable to pay back the balance, Joan was forced into bankruptcy. Little did she know that the money in her “inherited” IRA could now be seized by creditors during the bankruptcy proceedings.  Had Robert planned for this possibility, the funds would have stayed protected.

Protecting Wealth In An IRA For Beneficiaries

In order to protect money in an inherited retirement account, many estate planning lawyers in Atlanta are now recommending that their clients consider setting up a Standalone Retirement Trust.  This type of trust can protect against other threats, too.  Basically, it makes the money inaccessible to any future creditors of the trust’s beneficiary because the trust was not established or funded by the beneficiary.  By naming an independent trustee rather than having the beneficiary play this role, there are even more protections in place.  An Atlanta trust lawyer can offer a variety of suggestions on how to choose the appropriate trustee.

There are some fairly stringent guidelines that need to be followed to make sure the trust works as intended.  A trust lawyer in Atlanta will need to make sure these regulations are adhered to so that the trust can qualify.  When done properly, the trust’s distributions can be made similarly to how they would have from the IRA without the risk from the beneficiary’s creditors.

Whether you are just beginning the planning process or you have already created an estate plan, this big decision by the US Supreme Court can affect you and those you leave behind.  Make sure to contact your trust lawyer in Atlanta to ensure that your IRA is protected for the next generation.

Atlanta Wills and Estates Lawyer Answers, ‘Will Filing Bankruptcy Jeopardize the Inheritance Left to Me By a Loved One?’

By Steve Worrall, Atlanta wills and estates lawyer

Perhaps you saw it on the news a few weeks ago that economists on Wall-Street declared the recession officially over. 

I’m not sure how they came to such conclusions, but I look around and still see far too many friends and family struggling to recover from the chaos to really consider it over.   And while I acknowledge things may be improving on some fronts, I still find it hard to objectively look at a father who can’t find work or a mother who’s lost a huge chunk of her 401(k) plan to say our Country is officially in the clear.

I’m equally saddened by the number of bankruptcies taking place right now.  For many families, bankruptcy is the only way to break free from the mountain of debt that constantly rests on their shoulders.  Of course that’s not to say this decision is ever taken lightly by those who file, as the consequences of bankruptcy are long-lasting and sometimes severe—especially if you stand to inherit money.

Let’s say for example that you had a family member pass away who left you a cash gift in their will or trust.  On the surface it seems like this would be a much needed and timely relief for a family going through bankruptcy.  However, Federal bankruptcy rules declare that if you inherit money from a person who dies within 180 days of the date you filed for bankruptcy, you must tell the courts.   In simple terms, that means the inheritance now becomes a part of your bankruptcy estate and will be distributed to your creditors as the courts see fit.

This also applies to items that you may inherit such as cars, jewelry or furniture.  All of these items are subject to the administration of the bankruptcy estate.  However, this doesn’t mean that items like this are certain to go up on the auction block.  You can claim exclusion on certain things and the bankruptcy trustee has a certain amount of discretion in choosing what to liquidate. However, it can be extremely stressful to think about a family heirloom that has been in your family for years going to your creditors.

Hopefully your loved one had an Atlanta wills and estates attorney who knew a thing or two about protecting their inheritance from things like bankruptcy, creditors, divorce and the like. Ideally, your loved one would have been advised to set up a trust so any inheritance passed down to their family members would be out of reach from creditors and the courts.  If they did not, and you have not filed bankruptcy yet, this may still be an option if your loved one is willing to have their plan looked at by a qualified Atlanta wills and estates attorney.

Planning to avoid giving your hard-earned wealth to creditors is not illegal or immoral either.  You should think of it the same way you would when considering tax planning.  Tax planning is fine, but tax evasion is not.  The difference is whether you play by the rules and are honest.  For example, not telling the courts you received an inheritance is illegal and you could face serious consequences.  However, you are not skirting the rules if you are the recipient of a spendthrift trust.  That wasn’t your choice.

If you or your loved one needs help facilitating such a trust to protect your inheritance from the claims of creditors, simply call our Atlanta and Marietta GA wills and estates office at 770-425-6060 to schedule a Georgia Family Treasures Planning Session  at no charge ($750 value).  We will walk you through the necessary steps that must be taken to protect your inheritance from a bankruptcy filing or any other creditor’s claim. However, these appointments are limited to 5 per month, so call today.

Are Support Obligations Dischargeable in Bankruptcy?

One of the best blogs for information concenring bankruptcy is the Bankruptcy Law Network. If you don’t read this blog, you should. It is packed full of information on bankruptcy, debt and collection. It is compiled by a group of attorneys from all over the country. Recently, there was a post titled “Domestic Support Obligation: Dischargeable in a Chapter 7 Bankruptcy? This is a question I get often in my family law practice and this post does a great job of answering it.

BAPCPA, the new bankruptcy law which went into effect in October 2005, changed many things in the bankruptcy code. One of those things was the treatment of “a domestic support obligation.” That form of debt includes money owed to a spouse, former spouse, child, etc. for child support, to a spouse or former spouse for alimony, or a money obligation incurred in the course of a divorce or separation agreement.

Before BAPCPA, the law specified that you could not discharge child support obligations or alimony in a Chapter 7; you could, however, discharge an obligation owed to a spouse or former spouse under a divorce or separation agreement provided that the obligation was not in the nature of child support or alimony. This type of obligation is often called an equalizing payment, and is paid to the spouse or former spouse to equalize the division of property.

Under the old law, if the debtor didn’t have the ability to pay or if discharging the debt would result in a benefit to the debtor that outweighed the detriment to the spouse or former spouse, it could be listed and discharged. Under the new law, that can’t happen: in a Chapter 7 bankruptcy, the debt is treated as non-dischargeable, and when the bankruptcy is over, the debtor will still owe the money to his or her spouse or former spouse.

This is an issue you MUST discuss with your divorce attorney. If you and your soon to be ex-spouse are heading down the road of having to file for bankruptcy, you might want to consider filing a joint case. You both may be better off in the end.

SOURCE: Bankruptcy Law Network

SOURCE FOR POST: Kansas Family Law Blog

Divorce During A Chapter 13 Bankruptcy

You filed a Chapter 13 bankruptcy to save your home and your car, but now you and your spouse are separated and have filed for divorce. What happens to your case? (See also, What If My Spouse Dies During Our Bankruptcy?).

Every bankruptcy attorney who files Chapter 13 bankruptcies has this issue arise from time to time. When you approach your attorney about your divorce issues, you must remember that your attorney represents both of you, and cannot help you in any way that could be detrimental to your spouse.

You and your spouse need to consider making an agreement between yourselves on who pays what amounts, if any, and set it out in your divorce settlement. This way, once your divorce is finalized, you will have some way to enforce the terms that you agree upon if your ex-spouse fails to keep his or her part. You need to know that you will have to hire an attorney who is not your bankruptcy attorney to help you reach this agreement. If you cannot agree and the payments are not made in full, the Chapter 13 trustee will file a motion to dismiss your case. See What Happens If I Cannot Complete My Chapter 13 Plan (Part One).

If you simply cannot agree, but you wish to continue in your Chapter 13, and you only wish to pay for one of the vehicles, the house, or some other portion of the your debts, you will need to hire a different bankruptcy attorney to file a motion with the court to bifurcate (split) your case, and file a new plan for you only. Your spouse can also hire another attorney to file a new plan for him or her to pay for the items that he or she wants to keep, or your spouse could convert to a Chapter 7 bankruptcy. Your current attorney cannot represent either of you unless you both agree to waive the conflict that arises out of representing only one party.

SOURCE: Bankruptcy Law Network

When Bankruptcy Meets Divorce

Just over two years ago, President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, which became effective Oct. 17, 2005. If you are getting divorced, this new bankruptcy law could concern you. Reason: While you may not realize it, in this country, our high divorce rate and bankruptcy commonly intersect.

Here’s how. Until the enactment of the BAPCPA, the bankruptcy process was seen by some, and used by many, as a tool to permanently evade (or, to use bankruptcy terminology, “discharge”) family obligations foisted upon them by agreement or court order after a marital dissolution. Plus, once a person filed a bankruptcy petition–for liquidation under Chapter 7 or reorganization under Chapter 13 (or, less commonly, Chapter 11)–he gained the protection of an “automatic stay,” preventing creditors from taking any actions against him, his income or his property to collect their debts.

If the “debtor’s” income was less than the sum needed to maintain his lifestyle, including debt service, he would generally opt for the Chapter 7 liquidation, taking advantage of whatever homestead and property exemptions his state allowed, thus protecting his assets from creditors. If any nonexempt property existed, the bankruptcy trustee would liquidate it to pay secured creditors first, with unsecured creditors, such as ex spouses (who lacked collateral or guarantees) at the back of the line.

While Chapter 7 liquidation was not a means to avoid a mortgage or shirk taxes secured by liens, it did provide the debtor a clean slate, free from pesky consumer debt–credit cards, loans from friends and family, legal or medical bills–and whatever equitable distribution payments he couldn’t comfortably afford. Plus, if a person happened to live in Florida, Iowa, Kansas Oklahoma, South Dakota or Texas, he could really make out like a bandit because these states had (and still have) limitless homestead–and generous property–exemptions.