why estate planners may now need to re-think an uncountable number of revocable trusts in at least 30 jurisdictions.
by seymour goldberg, cpa, mba (taxation), jd
the practitioner’s guide to the ira distribution rules under the secure act
a kansas court case may make it necessary to redo many ira trusts and change them from revocable trusts to irrevocable trusts, affecting an untold number of estate plans in at least 30 jurisdictions. the case revolves around a woman named wand and a $93,314.48 promissory note to a bank.
wanda was living in a retirement home and getting by on medicaid when she died in 2003, leaving an estate that owed more than it owned. wanda’s ira accounts were set up to be payable to her revocable trust. but the court ruled that, because the estate’s assets were inadequate, the bank could seize wanda’s ira accounts.
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so, from an asset protection point of view, it may be worthwhile to use an irrevocable standalone trust, instead of a revocable standalone trust, as the beneficiary of an ira account. this may be especially true in jurisdictions that have adopted versions of the uniform trust code.
the reason this case is so important is that during an ira owner’s lifetime, ira accounts are protected from creditors, except the irs, of course. but there has never been a case prior to the kansas case in which the deceased ira owner’s creditors – other than the irs – could collect from a beneficiary of a deceased ira owner’s ira account unless the beneficiary the ira account of the deceased ira owner was his or her estate.
since many attorneys in the u.s. use revocable trusts in estate planning and not irrevocable trusts, there may be many revocable trusts that have been selected as the ira owner’s beneficiary of his or her ira account. based on the kansas case, it may be necessary to review an uncountable number of trusts and change them from revocable to irrevocable trusts.
example: say a surgeon has a $3-million ira account, payable to a revocable trust on his/her death, and has a malpractice judgment of $5 million dollars against him/her during his/her lifetime and has no other significant assets in his/her name. the surgeon’s ira is protected during his/her lifetime, so the $3-million ira account cannot be touched. if an irrevocable trust is the beneficiary of the ira account or, say, the ira owner’s children or spouse is the direct beneficiary of the surgeon’s ira, then there is no hazard issue. however, if a revocable trust is the beneficiary of the surgeon’s ira then the $3-million ira can be wiped out if the hazard issue is applicable in the jurisdiction. also, some states, like california, have language that’s similar to a degree to the kansas case regarding revocable trusts. that means practitioners must check every jurisdiction in the u.s. to see whether a revocable trust should or should not be the beneficiary of an ira account owner.
the case is not new. it was decided in 2007, and not published, for purposes of precedent, until 2010. but until now, it seems that few, if any, estate experts have noticed it. and the ramifications could be huge.
according to the court of appeals of kansas in commerce bank, n.a. v. bolander, 239 p.3d 83 (2007), 44 kan. app. 2d 1, a decedent’s ira account that is payable to a revocable trust is subject to the claims of creditors of the deceased ira owner if there are insufficient probate estate assets.
the appellate court relied on the provisions in kansas law that provide that when the settlor of a revocable trust dies, that the property of the revocable trust is subject to the claims of the settlor’s creditors under the kansas uniform trust code if there are insufficient probate estate assets.
as a result, the deceased ira owner’s accounts that were payable to the revocable trust became vulnerable to the creditors of the deceased ira owner.
it should be noted that whether or not a jurisdiction has adopted a version of the uniform trust code, there may be case law and other statutes that cover the issue regarding creditor’s rights and claims against the settlor when the settlor’s assets are in or are payable to a revocable trust.
- remember that an irrevocable trust is not an irrevocable beneficiary of the ira owner. the ira owner who is competent can change the beneficiary of his or her ira account at any time.
- also remember that if a revocable trust is used as the beneficiary of an ira account, then according to the irs rules you must specifically state in the trust document that the revocable trust shall become irrevocable on the death of the ira owner.
if one is concerned about the holding in the commerce bank opinion, then name an irrevocable trust as the ira beneficiary instead of a revocable trust.
doing so generally provides protection from creditors of both parties, namely from the creditors of the deceased ira owner and creditors of the ira beneficiary.
one must remember that we live in a litigious society.
brief summary of commerce bank case
commerce bank, n.a. v. bolander
239 p. 3d 83 (2007)
* initially an unpublished opinion – *unpublished opinions are not precedential but may be used as persuasive authority. the kansas supreme court later granted a motion to publish this case. the published version was filed with the clerk of the appellate courts on july 30, 2010.
selected portions of the opinion are provided below.
in the commerce bank, n.a. v. bolander case, wanda executed a trust where she was the beneficiary of the trust during her lifetime and reserved the right to amend or revoke the trust at any time. the purpose of the trust was to provide for the educational expenses of her lineal descendants.
when wanda died, her two iras were payable to her trust. the ira’s total value at the time of her death was $212,545.80.
commerce bank sought a monetary judgment against her estate and the trust. the bank claimed that the trust property was subject to the bank’s claim. the trustee argued that the bank could not attach the trust assets.
the kansas uniform trust code provides that during the lifetime of the settlor, the property of a revocable trust is subject to the claims of the settlor’s creditors. kansas law at k.s.a. 58a-505 of the kansas uniform trust code provides in part that “[a]fter the death of a settlor, and subject to the settlor’s right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor’s death is subject to claims of the settlor’s creditors, costs of administration of settlor’s estate. . . to the extent the settlor’s probate estate is inadequate to satisfy those claims, costs, expenses, and allowances.” the court indicated that california law on this subject is similar to kansas law.
the california probate code at §19001 provides: upon the death of a settlor, the property of the deceased settlor that was subject to the power of revocation at the time of the settlor’s death is subject to the claims of creditors of the deceased settlor’s [probate] estate and to the expenses of administration of the estate to the extent that the deceased settlor’s estate is inadequate to satisfy those claims and expenses.
the appellate court held that it was proper for the bank to attach the assets in the trust to satisfy the judgment entered for a promissory note that was executed by wanda during her lifetime based on the kansas statute. there was no evidence disputing that the estate was insolvent, the trust had assets in excess of $200,000, and the bank’s claims were approximately $80,000. the assets in the trust subject to the claims of wanda’s creditors included her ira accounts that were payable to her inter vivos revocable trust.
the court relied on the specific language found in k.s.a. 58a-505. the relevant portion of k.s.a. 58a-505 provides as follows:
58a-505. creditor’s claims against settlor.
(a) except as provided by . . . , whether or not the term of a trust contains a spendthrift provision, the following rules apply:
(1) during the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor’s creditors.
(3) after the death of a settlor, and subject to the settlor’s right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor’s death is subject to claims of the settlor’s creditors, costs of administration of settlor’s estate, the expenses of the settlor’s funeral and disposal of remains, the homestead, homestead allowance, the elective share rights of the surviving spouse . . ., and a statutory allowance to a surviving spouse and children, to the extent the settlor’s probate estate is inadequate to satisfy those claims, costs, expenses, and allowances.
* * *
it is important to note that over 30 jurisdictions have adopted versions of the uniform trust code.
many of those jurisdictions (but not all) have statutory language similar to the language found in the kansas version of the uniform trust code.
for example, the new jersey uniform trust code section 3b:31-39 provides creditor’s claim against settlor:
- whether or not the terms of a trust contain a spendthrift provision, the following rules apply:
(1) during the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor’s creditors.
(3) after the death of a settlor, and subject to the settlor’s right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor’s death is subject to claims of the settlor’s creditors, costs of administration of settlor’s estate, the expenses of the settlor’s funeral and disposal of remains, and to a surviving spouse or partner in a civil union and children to the extent the settlor’s probate estate is inadequate to satisfy those claims, costs, expenses.
* * *
the jurisdictions that have currently adopted the uniform trust code, include:
- alabama
- arizona
- arkansas
- colorado
- connecticut
- district of columbia
- florida
- hawaii
- illinois
- kansas
- kentucky
- maine
- maryland
- massachusetts
- michigan
- minnesota
- mississippi
- missouri
- montana
- nebraska
- new hampshire
- new jersey
- new mexico
- north carolina
- north dakota
- ohio
- oregon
- pennsylvania
- south carolina
- tennessee
- utah
- vermont
- virginia
- west virginia
- wisconsin
- wyoming
please note that the florida trust code at §736.0505, creditor’s claims against the settlor does not cover the issue regarding post-death creditor’s claims against the settlor who previously established a revocable trust during his/her lifetime. certain other statutes in florida cover that issue in depth.