May 25, 2010

Florida Courts End Creditor Protection for inherited IRA’S

Until recently, it was generally accepted that all IRA’s were fully protected from creditors under Florida Statutes. Now, a recent court ruling has Florida IRA owners shaken up and realizing that not all IRA accounts will offer creditor protection.  

In a recent Florida case, a creditor obtained a judgment which enabled him to seize funds from an individual’s inherited IRA.  The individual had filed a claim of exemption and argued that the IRA, which he had inherited from his father, was exempt from garnishment under Florida Statute 222.21(2)(a). The trial court found that even though this statute  does protect “money or other assets payable to an owner, a participant or a beneficiary” in a fund or account that is maintained as an IRA, this statutory protection does not extend to an inherited IRA, and denied the  claim of exemption.

The Second District Court of Appeals upheld the trial court, concluding that the above statute protecting IRA’s from creditors, “does not apply to inherited IRAs because the plain language of that section references only the original ‘fund or account’ and the tax consequences of inherited IRAs render them completely separate funds or accounts.”

What are the implications?

In these challenging economic times, creditors are trying ever more aggressively to go after protected funds in IRA and other accounts. Statutory treatment of these accounts is a topic that has important implications for  all of our clients and is one we are following closely.

At this point, with proper planning, one can still achieve a high degree of confidence that an inherited IRA will remain creditor proof. For example, the naming of a properly drafted conduit trust or discretionary trust as the beneficiary of an inherited IRA, will, generally, result in full protection under the state’s spendthrift law and provide the maximum possible protection from the creditors of a beneficiary of the trust.

In light of the continual changes in regulations and in economic and or personal situations, estate and asset protection planning must be reviewed on a regular basis. If you have any concerns about IRA protection or any other related matter, please give us a call at (305) 931-3200.

Until next time,

Austin A. Frye, MBA, JD, CFP®

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Legal services provided by the Law Offices of Frye & Associates, P.L. are separate and independent of services offered by Frye Financial Center. Additionally, the Law Offices of Frye & Associates, P.L. and the legal services offered are not affiliated with nor endorsed by LPL Financial.