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.

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:

1. Establish legal ownership or other legal right to remain within 90 days of the death of the Borrower
2. Unsure all other obligations of the predeceasing Borrower contained in the loan documents, i.e, payment of taxes and insurance
3. 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.

But the information family and friends will need when a loved one dies goes far beyond those much-talked-about documents, and having them can make the end of life just a little less painful for those who remain behind.

Consider the experience of John J. Scroggin, who runs a tax business and estate-planning firm in Atlanta. His father, who died in 2001, wanted to be buried in Arlington National Cemetery in Washington.

“I called Arlington and they told me I needed his DD 214 to bury him at the cemetery.” Mr. Scroggin recalled. “I had never heard of a DD 214, but they told me if I could not find it, they would put him in cold storage for six months while they found it.”

After a frantic search, “I found Dad’s DD 214 as a bookmark in a book,” he said. The Arlington burial took place. The lesson: Add military discharge papers to the documents you hand over to family members or trusted friends.

Maureen Nelson, of Walnut Creek, Calif., had a less satisfying outcome. “My mom died and told both my sister and I that she was a member of the Neptune Society, which cremates the deceased and scatters the ashes at sea,” she said.

“We called to have them pick her up from the convalescent hospital where she died,” she explained. “They came. But when they checked their records they couldn’t find her name, so they left. My sister said my mom even showed her the paperwork. But she must not have sent it in.” The lesson? If you’ve made your own burial arrangements, make sure you’ve shared the details.

The legal and emotional complexity of end-of-life planning went from theoretical to real for me recently when I began helping my 89-year-old father gather his documents. One of the many things I learned: He would like a funeral with military honors, having served in two wars. So Mr. Scroggin’s advice had special resonance.

Tips on preparing for the end of life can fill a book — as Erik A. Dewey, a writer from Tulsa, Okla., knows firsthand. It was with great difficulty that he sorted through heaps of paper and online information after his father died at age 65, a week from retirement.

He decided to share what he had learned by writing “The Big Book of Everything.”

His book, which is free online, has been downloaded about 1,000 times a month since it went up about five years ago, he said, and also includes data that people need to keep track of while they’re alive, like school and employment history and previous addresses.

Preparing for your own death is “tedious and not very pleasant,” acknowledged Mark Gavagan, who wrote the workbook, “12 Critical Things Your Family Needs to Know.”

“But if something happened to your or a spouse, would your loved ones know what you have, where it is and what your wishes are?”

While getting these items in order is more urgent for the elderly, all of us need to do it. Ask yourself if you can check off some of the most basic items.

WILL OR LIVING TRUST A will, of course, distributes your assets after you die. With a living trust, the  assets you have transferred to the trust (your home, bank accounts and stocks, for example) are administered for your benefit during your lifetime, and then transferred to your beneficiaries when you die.

Despite common advice that a living trust is better than a will because you don’t need to go through probate — the court process that inventories and distributes a person’s property after death — that’s not necessarily true, said Sally Hurme, an elder law attorney with AARP.

“The benefits of trusts are overplayed and the disadvantages of probate are exaggerated,” said Ms. Hurme, who is author of the forthcoming “ABA/AARP Checklist for My Family: A Guide to My History, Financial Plans and Final Wishes.”

“There are certain circumstances when trusts are appropriate, such as if you have out-of-state real estate or a family business that will continue to be run,” she said. Otherwise, she said, a will is fine. If you have any doubt, it’s best to research it further or consult a lawyer.

If you decide to write up a will without a lawyer, using online forms, for example, be sure you do it right; a badly executed will can be worse than none at all. That’s what Lisa Kinsman’s sister found out after her husband was killed in a plane crash when he was 28.

“He had drawn up a will just before he left on the trip” that claimed his life, Ms. Kinsman, of Larchmont, N.Y., said, “but he had filled out some things incorrectly, so all his property would have ended up going to his sister instead of his wife.” She had to go through a lengthy court process to get what would have gone to her without any will.