Creditors & Risk of Roth IRA at Death

Creditors have a right to your probate estate.

Executing an estate has many complicated rules and regulations. How you name beneficiaries and set up your estate plan will determine whether or not creditors will have any claim on your IRA assets upon death. Understanding how to structure things can save preserve your IRA assets to your beneficiaries.

Creditors' Rights

Creditors have a right to make a claim on your probate estate. This means that all assets placed into your probate orders will allow creditors the ability to place liens on the estate and get what they can before the assets are passed on to the beneficiaries. Essentially the probate estate has to be free and clear of debts prior to being distributed to the heirs.

Roth IRA Structure

The Roth IRA structure states that the funds are not included in the probate estate, bypassing the system. This means that beneficiaries to a Roth IRA are able to request death benefits on the Roth IRA without going through probate court. The account custodian pays the beneficiaries directly. This is an efficient account structure that allows beneficiaries quick access to assets without accounting to anyone else.

IRA Exceptions

While the structure of the Roth IRA is very efficient, you need to consider who is named as a beneficiary. If you name your "estate" or your "will" as the beneficiary to your IRA, your will properly allocate the resources. However, you have just placed the assets into your probate estate. This means you have nullified the benefit of a Roth IRA, bypassing probate and giving creditors access to the funds through the execution of your estate.

Significance

Many people might not think about what effect debt has on an estate. The significance of bypassing probate and thus creditors through the proper beneficiary designation of a Roth IRA can mean funding a child's or grandchild's college education even though there may be other debts to repay in the estate. Of course, the beneficiaries still have the opportunity to use the assets to pay down estate debts; it reduces the obligation and allows you to have more control of the IRA assets after death.

Considerations

While you will help avoid creditors accessing the Roth IRA asset through a proper beneficiary designation, you will not avoid having the asset considered as part of your entire federal estate. This means that the one creditor you cannot avoid is Uncle Sam, no matter how you designate your Roth IRA heirs. While 2010 is the one year where no federal estate transfer taxes exist, if your entire estate exceeds the "unified credit amount" your beneficiaries will pay taxes based on the aggregate value of your estate, including the Roth IRA.

References

• FairMark: Inherit Roth
• Money Management: Inherit IRA
• FreeAdvice: Probate
• NOLO: Using Roth IRAs to Avoid Probate