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To be or not to be a retirement fund: The Supreme Court rules

The U.S. Supreme Court has thrown a monkey wrench into the disposition of a useful estate planning tool. The circumstances are a little out of the ordinary, but the decision clarifies a piece of the tax code that a few federal circuit courts interpreted differently.

There are many ways to approach estate planning, and there are many ways to approach retirement planning. Individuals and couples may also choose the "your chocolate got in my peanut butter" approach: looking at retirement and estate planning as complementary. In both cases, we are evaluating our assets and liabilities; it is at that point that determining what we need to do to make ends meet until our death meets what we want to leave behind for our families, friends or charities.

Retirement accounts -- IRAs and 401(k)s, for the most part -- are deceptively complicated. What looks like an easy "save now, take cash later, give leftovers to chosen beneficiary" scheme goes through a strange metamorphosis after the account holder dies. The disposition of the funds depends on a number of factors, as do the taxes on the account. The rules can differ depending on marital status and age, or whether the account holder was retired at the time of death.

It may come as no surprise to many to hear that the IRS itself may be confused by the rules. A regulation in one place may say that Asset A is taxable, while another regulation buried elsewhere in the code says that only These Things can be counted as Asset A and Those Things are definitely not. This is, in fact, a little like what happened to the woman in the Supreme Court case who inherited her mother's IRA.

We will get into the details in our next post.

Source: Courthouse News, "Inherited IRAs Aren't Creditor-Safe, Court Says," Barbara Leonard, June 12, 2014

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