An individual retirement account (IRA) can be subject to probate proceedings in instances where the financial protection afforded to it are superseded by overriding laws and judicial orders. For example, states such as Georgia that have not adopted Uniform Probate Code have stricter limitations on the financial security commonly associated with IRAs. Even at the federal level, several regulations place numerous limitations in the financial fortitude of otherwise secure retirement accounts.
The estate is the territory of probate court in so far as assets in that estate are not protected from specialized financial instruments such as conduit trusts. In other words, any IRA that is not explicitly restricted from probate administration becomes subject to a number of potential money grabs. To illustrate, according to the Internal Revenue Service (IRS), a qualified domestic relations order redistributes IRA money in accordance with court rulings.
One or more individual-designated beneficiaries are required to avoid probate. Moreover, if the correct beneficiary forms have not been completed by the IRA owner, the account custodian will automatically assign a beneficiary. In some cases this is the next of kin, but in other instances the beneficiary is the financially exposed estate. Beneficiary paperwork can be obtained from the fiduciary entity through which the IRA is managed, does not require a lawyer and can avoid costly proceedings later on.
A beneficiary who inherits an IRA from a debtor can still be subject to creditor claims via probate if the amount in the IRA is not protected by state law. Additionally, mandatory distributions from the IRA can be claimed upon even if the IRAs assets are otherwise protected. Since SEP and SIMPLE IRAs are employer managed, they offer protection from creditors not typically available to traditional and Roth IRAs under the Employer Retirement Income Security Act.
Wills are another means where IRAs are subject to probate. For example, a will that specifies how an IRA is to be distributed or used to pay off debt can replace beneficiary designations. In cases where both the will and a beneficiary is established, the beneficiary designation can still be utilized as a default mechanism. Nevertheless, in such case the beneficiary can still be challenged with a will based claim made through the probate process.
In the event of back-taxes due, the IRS also has the right to intervene through a proof of claim if the IRA is subject to probate court, and via tax levy if the IRA is exempt from the probate court's authority. However, according to the IRS, claims on retirement accounts are considered only after other sources of tax payment have been exhausted or when collection efforts for those sources are more expensive.
- “American Bar Association, Law Trends and News, Volume 2, Number 4”: Coordinating Retirement Accounts With Estate Planning 101; July 2006; Keith A. Herman
- University of Pennsylvania Law School; Uniform Probate Code; 2004
- IRS.gov: Collection Process -- Proof of Claim Procedures in Decedent and Non-Bankruptcy Insolvency Cases
- “Forbes”; Five Rules For Inherited IRAs; Deborah L. Jacobs; June 2010
- IRS.gov: Qualified Domestic Relations Order
- The Practical Tax Layer; How Safe Is Your Pension? Creditor Protection for Retirement Plans and IRAs; Winter, 2008; Richard A. Naegele and Mark P. Altieri