In an unanimous ruling this June (CLARK v. RAMEKER), the Supreme Court of the United States removed an important tool from the Estate Planner’s belt. Inherited IRAs are now vulnerable to creditors.
Prior to the ruling, inherited IRAs were considered “retirement funds” and were protected from bankruptcy proceedings. Using an IRA was a simple way for people to protect their estate. Although qualified retirement plans, IRAs, and similar “retirement funds” remain exempt from creditors under the Bankruptcy Code, that protection lapses when the assets pass to a beneficiary. The Court reasoned that, in the context of a bankruptcy case, an IRA inherited by a beneficiary who files for bankruptcy does not consist of the beneficiary’s own “retirement funds” and is therefore available to pay the creditors of the beneficiary.
Importantly, retirement fund inherited by a Surviving Spouse are still protected from the Surviving Spouse’s creditors. The National Consumer Bankruptcy Center explained Justice Sotomayor’s reasoning in the majority opinion:
“The opinion focused on differences in…inherited IRAs which go to a surviving spouse and those that go to someone other than the spouse. A spouse has the option of rolling over the funds into a new IRA, treated like any other IRA, but a non-spouse is limited to treating the funds according to rules applicable only to inherited IRAs.”
This decision does not preclude states from offering bankruptcy protection to inherited IRAs under state law. Massachusetts, however, does not have and does not appear to be creating any such law.
In Massachusetts, therefore, the use of IRAs or other retirement funds to protect assets from a beneficiary’s creditors is no longer effective. To protect these funds in light of this ruling, Estate Planning attorneys could establish a special type of revocable trust, called an IRA Trust, to be the beneficiary of the funds. When properly drafted, and IRA trust will not only protect your retirement accounts for the benefit of your family, but it will also protect beneficiaries from their own bad decisions, inexperience with investing, excessive spending habits, and overreaching spouses.
Reverse Mortgage Law Update: Update to Non-Borrowing Spouse Rules
HELPFUL DEFINITIONS:
A Mortgagee Letter is a notice issued by the Department of Housing and Urban Development (HUD) to inform lenders (and borrowers) of changes in Federal Housing Administration (FHA) procedures, rules, and policies.
The official name for what is colloquially known as a “Reverse Mortgage” is a “Home Equity Conversion Mortgage”.
The “Deferral Period” is the period of time following the death of the last surviving Mortgagor during which the due and payable status of a HECM is further deferred based on the continued satisfaction of the requirements for a Non-Borrowing Spouse under FHA requirements.
This August, a Mortgagee Letter was issued regarding a change in the rules that protects a Non-Borrowing Spouse (NBS). For those borrowers with case number assignments on or after August 4, 2014, NBS will be able to remain in their homes, provided they are married to the borrower at the time of closing and their spousal status is disclosed at that time via a certified letter, and that they meet FHA residency requirements. The HECM loan will not be due and payable until the death of the last-surviving of the Non-Borrowing Spouse (or until another listed event occurs).
Primary residency (such that will allow the NBS to remain in the home) is defined as the property in which the borrower (and NBS) spends the majority of the calendar year. After the Borrower passes, the Surviving NBS may remain in the home if they:
- Establish legal ownership or other legal right to remain within 90 days of the death of the Borrower
- Unsure all other obligations of the predeceasing Borrower contained in the loan documents, i.e, payment of taxes and insurance
- Does not allow the HECM to become due and payable for any other reason.
As long as the NBS meets these requirements AND continues to reside in the property, the proceeds of the loan will not be disbursed to the NBS, but will continue to accrue interest throughout the Deferral Period.
These changes and policies DO NOT APPLY to loans with case numbers issued BEFORE August 4, 2014.