Although spouses receive special treatment when inheriting a retirement account such as an IRA (the ability to roll over the account into a personal retirement account and to stretch the distributions over their lifetime), the retirement account you leave for your spouse can still be seized in a divorce, a lawsuit, or a bankruptcy proceeding.

Three Options Available to Surviving Spouses

When your surviving spouse inherits your IRA, he or she generally has three options:

• Cash out the inherited IRA and pay the income tax

Warning! The cashed-out IRA will not have creditor protection and accelerates taxation. Once your spouse cashes out the account, he or she may use the money in any way. In addition, if your spouse dies before all the money has been spent, he or she can leave the money to anyone (even a mere acquaintance who was unknown to you).

• Maintain the IRA as an inherited IRA

Warning! The inherited IRA will not have creditor protection. However, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a spouse can take the required minimum distributions from this account over his or her lifetime without being held to the ten-year rule, as most other beneficiaries are.

• Roll over the inherited IRA and treat it as his or her own

Warning! The spousal rollover may offer some creditor protection but not in all cases. In addition, depending on whom your spouse leaves his or her retirement account to, there is now a larger sum of money to be distributed by the end of the tenth year after his or her death, accelerating additional income taxes for the next beneficiary.

Many find it frustrating that a stranger can swoop in and take their hard earned money. Fortunately, there is a solution: a properly drafted standalone retirement trust (SRT).

Properly Drafted Standalone Retirement Trusts Can Provide Creditor Protection

An SRT is a special type of trust designed to be the beneficiary of your retirement accounts after you die. It can protect your retirement account funds from your beneficiary’s creditors. In fact, we can include trust provisions that specifically protect your spouse in situations such as

• second marriages;
• divorce;
• lawsuits from car accidents, malpractice, or tenants;
• business failure; and

Want To Know More? 

The bottom line is that a properly drafted SRT is often your best option for protecting your retirement accounts after you die. Want to know more? Please contact our Norman, Oklahoma office at 405-928-4075.  We look forward to working with you.

Your retirement account provides asset protection during your lifetime, but as soon as you pass that account to a loved one, that protection evaporates. When your spouse, child, or other loved one inherits your retirement account, creditors have the power to seize it and use the funds to satisfy their claims. This means one lawsuit and POOF!—your life-long, hard-earned savings could be gone. Your loved one could be left penniless. Fortunately, there is a solution to this problem. A special trust called a standalone retirement trust (SRT) can protect inherited retirement accounts from your beneficiaries’ creditors.

You want your loved one to benefit from your retirement account, not the creditors. If you or your beneficiaries fall into any of these five categories, you should seriously consider using an SRT to protect your retirement accounts:

1. You have substantial combined retirement plans. Loved ones can use an SRT to shield the retirement plans from creditors.

2. You believe your beneficiary may be less than frugal with the funds. You should consider an SRT if you are concerned about how your beneficiary will spend an inheritance, as you can provide oversight and instruction on how much they receive and when.

3. You are concerned about lawsuits, divorce, or other possible legal actions. If your beneficiary is part of a lawsuit, is about to divorce or file for bankruptcy, or is involved in any type of legal action, a properly drafted SRT can protect the inherited retirement accounts from those creditors.

4. You have beneficiaries who receive assistance. If a beneficiary receives, or may qualify for, a needs-based governmental assistance program, it is important to know that inheriting an individual retirement account may cause the beneficiary to lose those benefits. An SRT can be drafted to avoid disqualification.

5. You are married with children from a previous marriage. If you are married and have children from a previous marriage, naming your spouse as the primary beneficiary of your retirement account could allow your spouse to intentionally (or unintentionally) disinherit your children, even if you named your children as the contingent (backup) beneficiaries on the account. You can avoid this by naming your spouse as the lifetime beneficiary of an SRT and then having the remainder pass to your children from a previous marriage after your spouse’s death.

You have worked hard to protect and grow your wealth–let’s keep it that way.

You worked hard to save the money in those retirement accounts, and your beneficiaries’ creditors should not be able take it from them. Give us a call and let us show you how an SRT can help you protect your retirement accounts. You can contact our Norman, Oklahoma office at 405-928-4075. 

Retreating to a warmer climate for the winter sounds like an ideal way to spend a few months. To help make this dream a reality, some individuals choose to rent out their second homes when they are not in use. But before you list your second home for rent, there are a few things you should consider.

Benefits of renting out your property

One reason to rent out your second home is to help cover the expenses of owning that second home. In addition, you will not have to fully close it up when you leave because someone may be staying there soon after. Frequent use of the property may also help deter burglars who might otherwise think the property is abandoned. Enlist a property manager to respond to any renters’ needs or check the property during periods of vacancy.

Check local zoning ordinances and deed restrictions

Some communities may prohibit renting out a property. If you are purchasing a second home or have already purchased one, it is important to review your deed and contact the appropriate authorities or homeowner’s association to make sure that you are allowed to rent out your property. If not, you could end up angering your neighbors and becoming involved in a costly lawsuit.

Make sure you are insured

Before you open your second home to renters, check your homeowner’s insurance policy to see if it covers rental of the property. You may have to purchase a new policy or add a rider to your existing policy to provide sufficient insurance coverage, but the additional expense will be well worth the investment. The insurance will act as your first line of payment if a renter is injured on your property or the property sustains damage while being rented

Determine liability exposure

Because many different renters may stay at your second home, there is an increased risk of lawsuits arising in connection with this type of use. Transferring ownership to a limited liability company (LLC) can be a worthwhile option for creating greater protection from a potential lawsuit. If a renter gets injured on the property, sues the LLC that owns it, and obtains a judgment that exceeds any property insurance limits you have, the renter can only go after the assets owned by the LLC to satisfy any claims, not your personal assets or those of any other owners of the LLC.

However, in some states, a single-member LLC (an LLC in which you are the only member) does not provide enhanced protection from your personal creditors. The reason is that your creditors should be able to seek relief through your LLC to satisfy their claims because there are no other members that will be negatively impacted by the seizure of money and property owned by the LLC.

Before transferring your second home to an LLC, it is important to speak with the holder of any mortgage on the property. In many cases, the transfer of a mortgaged second home to an LLC can cause the due-on-sale clause to be triggered, requiring repayment of the loan in full. Unless you are financially prepared to pay off the mortgage, this may be a substantial and unwelcome financial hardship.

Consider the tax implications of renting out your second home

According to the Internal Revenue Service, if you rent your second home for fifteen days or more a year, the rental income must be reported. In most cases, you will be able to deduct the rental expenses that you have incurred. Because you are using the second home for both rental and personal purposes, you will have to divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Work closely with your tax advisor or preparer to ensure that you accurately report your rental income and expenses and take the appropriate deductions on the right forms. Your tax preparer or advisor can also provide you with tips on proper recordkeeping

Get your second home ready for occupants

Before your first renter arrives, it is important to go through and remove anything personal that you do not want used, broken, or taken. This may make the space feel a little sterile, but the last thing you want is for a family heirloom to be stolen. You will also want to hire a cleaning crew to come in before and after each group. Not only will this keep the furnishings in good condition, but it may also encourage people to rent with you again. If possible, take pictures prior to new renters arriving in case damage occurs. Doing so will provide proof of the property’s condition before they arrive to compare with the condition after they leave.

We are here to help

While owning a second home can be expensive, it can offer a lifetime of memories for you and your loved ones. We are here to assist you to make sure your second home is properly included in your estate plan and protected for years to come. Give us a call today so we can discuss ways to maximize and protect your second home. We are available for in-person and virtual meetings.