Stop Creditors from inheriting from you or your spouse

As mentioned previously, the retirement account you leave to your spouse can be still seized by creditors during a divorce, lawsuit or bankruptcy. How can your spouse protect this inheritance and  prevent this from happening? Your spouse has three options they can take:

Cash out the inherited Individual Retirement Account (IRA) and pay the income tax  

Your spouse has the option of cashing out the IRA at any age, although this type of withdrawal comes with a 10% penalty as well as any income tax due, if withdrawn before age 59½ although there can be exceptions to this rule. Some exceptions for an early withdrawal include:

  • A first-time home purchase
  • Qualified higher education expenses
  • Qualified major medical expenses
  • Long-term unemployment expenses
  • Permanent disability.

Your spouse will have to take minimum distributions from the account based on their own life expectancy, starting by December 31 of the year after the original owner’s death. These required withdrawals are similar to the required minimum distributions (RMDs) for IRA holders over age 70½, but they use a different life expectancy table. The withdrawals will still be taxable, but the rest of the money can continue to grow tax-deferred in the account.

In addition, if your spouse dies before all the money has been spent, he or she is free to leave the money to anyone.

Maintain the IRA as an inherited IRA  

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 

Spouses also have the option of rolling over the money into their own IRA, so they don’t have to start taking required minimum distributions (based on their life expectancy) until they reach age 70½. But they’d still pay the 10% early-withdrawal penalty for money they take from the account before age 59½.

If the original IRA owner was 70½ or older and had already started taking RMDs before he or she died, then the beneficiary can continue to take annual withdrawals based on the original owner’s life expectancy schedule or take withdrawals based on his or her own life expectancy.

The spousal rollover has its drawbacks too. There is no guarantee of spousal protection and depending on the beneficiary, the money will have to be distributed by the end of the tenth year after his or her death, accelerating income taxes for the next beneficiary.

Fortunately, a Standalone Retirement Trust (SRT) can help you with that.


While your spouse has options, a Standalone Retirement Trust can really help solve a lot of problems. Want to know more? Contact Music City Estate Law in Franklin, TN today and we can help find a solution for you. 

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