Do IRA’s and 401(k)’s Differ In Terms Of Creditor protection? |Weekly Wednesday Wisdom Webinars

Certified Elder Law Attorney and Financial Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm.

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Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.


On this week’s webinar, attorney and advisor Chris Berry of answers the below questions.

  • I have a traditional IRA, which includes an after-tax basis of $16,331. I am considering transferring the pre-tax amount to mg 401k then can I do a tax-free Roth conversion of the remaining?
  • Do IRA’s and 401(k)’s differ in terms of creditor protection?
  • Ed Slott mentioned typically not to name the trust as a beneficiary of IRA’s etc. Can you speak why you recommend it and he doesn’t?
  • Is there any way around the 5-year lookback period for Medicaid/Nursing Home Care?
  • My house is in the trust, can you explain the nature and reason for a Lady Bird Deed?


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Episode Transcript

All right we’ll get this started, hello everyone, good to see you and my name’s Chris Berry of course and we do these every week at one o’clock right when the tornado siren drill is going on. At least where I’m at so I don’t know if you hear that wherever you’re watching or listening, but we like to do these each week every Wednesday at one o’clock and then they are recorded and they go up on our Youtube channel which I invite you to subscribe to if you haven’t already subscribed to our Youtube channel. You can watch past episodes and what we do is there’s really no form or format for these other than I’m just really answering questions that people have submitted the previous week or questions that are submitted live while we’re having this conversation. 

It’s really just an opportunity to provide value and education. I was having a conversation with clients today and one of the things they said is there’s so much information out there they can’t tell what’s right what’s wrong what should apply to them. So that’s really I think one of my roles is to cut through all the bs and figure out what is the stuff that’s true. 

And what is the stuff that applies to a specific situation because there’s a lot of generalized advice out there and if you want to see and I guess to understand this is generalized advice too and if you want to see how some of this applies to your situation? It might take a little more of a phone call so understand that there is a lot of stuff out there a lot of times we talk in generalities and there’s a lot of exceptions to certain different rules. 

But my goal is to provide education and when we’re working with our clients figuring out what their goals are figuring out the best strategies help them achieve the goal and then pick the right tools so that I always like to start with a positive focus something positive that happens for me it’s two weeks out of total hip replacement surgery. 

So I’m 41 years old I didn’t expect to have a hip replacement at this point but I always joke around that your body is either going to rust out or wear out I just didn’t expect to start wearing my body out so soon. So yesterday I had my or Monday I had my two-week appointment and I went from a walker to a cane so I went from six legs down to three legs so I’m improving and so I’m pretty happy about that so that’s my positive focus. Ed writes in thinking warm so that’s good as well so with that we’ll go ahead and get started and again. 

I had some questions submitted ahead of time but if something’s unclear feel free to put it into it the chat or feel free to put in a question and answer and I’ll try to go ahead and address it as I’m going so with that let me go ahead and try to share my screen where I hit this button. 

All right so again we do these every week, it’s my pleasure to do these keep in mind anything that we talk about it’s good to sit down and figure out how this might apply to your specific situation. 

So if you do want to see how this applies I’m going to put the link in the chat but feel free to book some time on my calendar at and that should take you to a booking form to book some time on my calendar so that we’ll go ahead and get started so the first question I have I have a traditional IRA which includes the after-tax basis of 16 000. I’m considering transferring the pre-tax amount to my 401k then can I do a tax-free Roth conversion of the remaining? The answer to this is yes the key ingredient here is that it was in an IRA so you can do after-tax contributions to Roth from traditional IRAs. 

I guess the one thing I would caution you about is typically we don’t see people moving money to a 401k from an IRA you certainly can but I would just ask what is the purpose of that maybe it’s creditor protection we’ll get into that shortly but typically with an IRA one of the big advantages of an IRA is that you have a lot more freedom. Freedom in terms of what you do with the accounts for example if you try to do this strategy with a 401k you wouldn’t be able to do it. Second, you have a lot more freedom in terms of investment options with an IRA you have a lot more freedom in terms of beneficiary designations with an IRA so typically what we see people doing is they’re moving money from 401ks to IRAs we don’t see very often I’d have to know why specifically we’d want to do it we typically don’t see people moving IRAs to 401ks I’m not saying not to do it I just would like to know what’s the goal again goal strategy and then tool maybe it makes sense depending on what your goals are. 

But typically once someone has moved that 401k to an IRA, they keep it as an IRA because you have a lot more freedom. Freedom in terms of investments freedom in terms of beneficiary designations freedom in terms of Roth conversions are just a lot more freedom. There are some exceptions that I can think of off top of my head but again it would just be what is your goal and figure out the best strategy but to answer your question yes you can do that because again it’s an IRA if this money was already in a 401k you wouldn’t be able to do it. 

Number two, do IRAs and 401ks differ in terms of creditor protection? So this is to clarify something that came up previously, so both of these accounts both IRAs and 401ks are what’s called qualified accounts okay so qualified accounts one thing to keep in mind is that there is no Medicaid slash long-term care protection for either one of these accounts so if you were to need nursing home care. 

Anything inside of your 401k IRA, etc., would have to be spent down whether it’s in your name whether it’s in your spouse’s name those are all countable assets meaning they count towards that nursing home or Medicaid protection. But what they do offer is a form of creditor and bankruptcy protection, okay and there is a difference, the difference is that 401ks fall under ERISA so they fall under Federal IRAs fall under state law, and here’s a little interesting distinction is IRAs are protected up to a 1.3 million dollars from creditors and bankruptcies. 

401ks have unlimited protection so if protection from like bankruptcy is something that’s super-duper important to you then maybe that is a reason why to keep money inside of a 401k. But keep in mind either way to get that type of protection you would still have to go through bankruptcy which could be a big pain in the butt right another easier option if liability or creditors are concerned would be to getting umbrella coverage like an umbrella policy through your property and casualty guy typically you’re going to get about a million dollars worth of coverage for maybe 200 a year so it’s super cheap so if I guess protection from creditors, not Medicaid or nursing home is a big concern I almost wouldn’t want to rely on the bankruptcy protection I’d rather just pay a couple extra 100 bucks a year to build in that umbrella protection. 

Okay, but yes you do have more asset protection inside of a 401k so maybe if your big concern is asset protection maybe that’s a reason why to move that IRA into a 401k but I guess there are different ways to do that, and first I’d look to something that wouldn’t force you to go through bankruptcy I would look at maybe umbrella protections. And keep in mind even though you do have this creditor protection it does not apply to the IRS okay nor does it pretend to protect against kind of spousal claims so whether it’s in a 401k or IRA understand that it’s not protected for long-term care purposes it’s not protected for any IRS issues you don’t want to mess with the IRS and any type of spousal slash divorce issues either way whether it’s 401k or IRA it’s not necessarily protected okay so hopefully that’s helpful and doing a deeper dive just on the asset protection of those qualified accounts the big problem with qualified accounts and we’ve been banging this door since 2015. 

And especially recently is that it’s those are pre-tax accounts that the biggest risk you have isn’t creditor protection, I would say the biggest risk is tax risk where if taxes go up the value of those counts go down. Okay, number three, Ed mentioned typically not to name the trust as a beneficiary of IRAs can you speak on why you recommend it and he doesn’t so again this is getting to that generalized advice and I had to grab this is actually hanging in my office so let me just say that like I’m a big fan of Ed like that’s me and Ed. So, I’m a big fan of him, in fact, we’re Facebook friends and so we’ve worked together I’ve trained under him so I’m a big fan of his. That said if you were to kind of listen to any of his training or read any of his books he’s not a big fan of naming trusts as beneficiaries of IRAs and 401ks and again the reason for that is just he’s having to give very general advice. 

So there are a couple of reasons why he says this the first reason is that a lot of trusts and again not a lot of our trust but a lot of trusts say everything goes outright to the kids or something at age 25 or 30 or 35. And so, if your kids are over that age what’s the point of the trust right versus a lot of our trust-building the opportunity for a lifetime of asset protection so by naming the trust as a beneficiary of the IRA with our trusts. When we’re talking about building in legacy protection building asset protection for the next generation our trusts provide that protection versus a majority of trusts out there. 

Say, I’ll write to the kids at 25 30 35 so they don’t give or offer the lifetime of asset protection so the question is why to bother even having that basic type of trust in the first place that comes into effect two, not all trusts include what we call stretch out provisions, okay all of our trusts typically do a stretch out. I’m sorry stretch out so if the trust is not set up properly all the taxes have to be paid within five years of naming the trust as a beneficiary unless the trust is set up properly then we can stretch out the taxes to the maxim of 10 years under the securities act. Whether you name a beneficiary outright or you name a trust outright you can only stretch those taxes up to 10 years now there’s a lot of trusts out there that don’t qualify as designated beneficiaries so they lose the stretch out. 

So, if you have an unsophisticated trust that’s set up understand you might have to pay taxes sooner rather than later on those IRAs now with the trusts we build in provisions to allow that stretch. So when Ed is writing general information to the general public understand he’s not expecting you to be an attorney to understand the difference or an advisor to understand whether your trust qualifies for the stretch or not. So he’s giving general advice of look unless there’s a reason not to name the kids outright as beneficiaries so naming the trust. Alright, the stretch those are the big reasons why Ed says to name the IRAs but again the typically our trusts build in a lifetime of asset protection so that’s why you name the trust after the spouse typically, and then our trusts include the stretch out provisions okay, in fact, we used to do a lot of standalone trusts just for retirement accounts so and trust me I’ve had this conversation with many CPA advisors, attorney’s clients every time we have this conversation almost always depending on the trust we set up, we always name spouse first as a primary beneficiary then trust. 

There’s really no downside with naming one of our trust the beneficiary of an IRA you’re just you would if you didn’t you’d be missing out on this asset protection for the next generation which is a big thing for a lot of my clients they want to make sure that if they pass away the money they leave to the next generation is protected from creditors the money stays in the family versus going to an in-law. That type of thing all right number four let me see how we’re doing so a couple of questions come in I’ll make sure to get to those and let me see if there’s anything in the chat that I’ve missed nothing there. Okay, all right number four is there any way around the five-year look-back period for Medicaid so what we’re talking about here is nursing home or Medicaid costs which can run eight to 12, 13, 14,000 per month right and especially with us living longer long-term care costs are a big concern for a lot of people. 

And so that’s where one of our strategies is to if this is you we set up an asset protection trust we move assets into that trust things like your home and other pieces of real estate LLCs money and what that does is it starts a five-year race where if we can make it five years from the time we fund this trust before we need nursing home or Medicaid. Then everything inside of the trust is protected from that nursing home or Medicaid spend down so now we could have everything protected inside of that trust once we’ve made it past that five-year clock. So, the question here is what happens if we need long-term care at some point during this period? 

Well, one option is we just private pay to get to the five-year mark okay in fact I’m working with some clients right now complicated situation they have lots of pieces of real estate lots of lots he’s diagnosed we have a husband and wife he’s diagnosed with Parkinson’s unsure if we’ll make it the full five years. But we’re still setting up the castle trust moving these properties into the trust because once we make it five years if we do 100 of everything in the trust is protected plus it protects the surviving spouse as well if the husband were to pass away. 

But let’s say we don’t make it five years one option is we just private pay so we use other funds or take money out of the trust to get to that five-year mark. Okay, so it’s not just five years from the time we need nursing home care, it’s five years from the time we submit that Medicaid application so maybe if we get to year four we private pay to get to that fifth year and then now everything inside of the trust is protected. 

The other option is we can always back out of the trust and we do what we call Medicaid crisis planning and this is available even if you have someone in a nursing home right now. Okay, so if you have a loved one in nursing home right now they’ve done no pre-planning and let’s say they have  three hundred thousand dollars one option is you just spend down that money to get to two thousand dollars which is the asset limit for Medicaid. The other option is we could do a Medicaid crisis plan where depending on the situation we might be able to protect half of those assets so roughly a hundred and fifty thousand, so if you had a loved one in nursing home right now paying ten thousand dollars a month there’s things we can do at the last minute super complicated and we call this Medicaid crisis planning but we can protect a portion of that money. So ideally, when we set this up we set up the castle trust we make it five years a hundred percent of what we put into the trust is protected but if we don’t make it five years or we have a stroke right away or we’re in a nursing home now we have last-minute almost like hail mary type strategies to protect at least half of the assets typically okay so it’s not all or nothing we do have strategies even if we don’t make it five years. Alright, number five, and then I’ll get into some of these other questions that have come in my house is in the trust can you explain the difference or reason behind a ladybird deed? 

Yeah, so really we have two approaches with regards to real estate so how do you handle real estate an so there’s two ways that we handle real estate and it’s going to just depend on what type of trust do we have okay so if we have a let’s call it a revocable living trust so this is a trust that avoids probate distributes assets to the kids maybe protects the kids and we have a real estate the way that we fund that real estate is with what’s called a ladybird deed. Okay, and I’ll talk more about that in a second so the home is in your name while you live you can refinance it you can do whatever you want but if you pass away the ladybird deed says it flows into the trust and goes to the beneficiaries now the other option is you have what we call a Castle Trust which is an asset protection trust, which is different than the revocable trust in this situation. 

We would deed that property directly into the trust okay so now the trust is the owner very different than the ladybird deed so understand when someone passes away there are four ways assets transfer. We call this the state administration and the first would be joint ownership so husband and wife one of you pass away goes to the joint person. Never recommend naming your kids join on your real estate don’t do that there’s a whole slew of reasons why not to do that second would be beneficiary designations so a 401k IRA you named a beneficiary third would be through a trust you follow the terms of the trust but it doesn’t pass through one of these first three then ends up going to probate. 

And that’s of course what we want to try to avoid so really what the ladybird need is number two is a ladybird deed is basically just a beneficiary designation for your home the home is in your name. All your life you can refinance it you can sell it do whatever you want but if you pass away and you still have that house it flows into the trust and follows the distribution terms of the trust. 

The advantage of that just so what does this do it avoids probate okay all right now the other option is let’s say you have an asset protection trust a castle trust we would need it directly to the trust because hey it avoids probate and then b you get the asset protection of it that trust the asset protection trust would offer you. 

Okay, so you could sell the property the proceeds of that would be protected so really we’re either doing a lady bird deed or we’re doing a d directly to the trust with an asset protection trust so a couple questions regarding this 2019 built a new home and our names that had you update our trust include the trust fee of lady bird. 

Did you file that with the city or do we need to do that so with a lady bird deed either one of these deeds whether we do the lady bird deed or we need it directly to the trust we always file it so it’s always filed when we sign it we send it to the property or we send the property transfer affidavit to the county so the tax assessor knows and it doesn’t uncap any of your property taxes or anything like that so nothing you need to worry about. Lady bird deed would be deeded directly held in your name we would file the deed with a county and then upon death file a death certificate and transfers it to the trust or to the kids yep so you are welcome a couple questions here that have come in  so that’s all the questions that came in ahead of time here’s a question advice regarding investing in dividend paying stocks. I’m gonna have to figure out what you’re trying to do my only concern with dividends or they’re not a sure thing I’m not saying that’s the only way to create income but that is a way to create income the only concern would be whether those dividends would continue also that can create some taxable issues. 

So, one of the things we do focus on is income planning and a lot of times I’m trying to create tax-free income sources so if we’re relying on dividends that’s going to be something that potentially could cause us tax issues for the rest of our life so that is one approach. I’m not saying it’s a magic wand I’m not saying it’s wrong it’s all about figuring out what are your goals so if your goal is to create income is looking at dividend-paying stocks one strategy sure can we help you with that yeah, but we’d want to look at all the other strategies to pick the best strategy and then we can pick the best tools. kay what is a portfolio that’ll be generating the dividends you want if that’s the strategy we you want, so I’m not pro or negative against that, it’s just a different it’s another strategy that’s available for income planning. 

Another question, my sister was married over 20 years ago has been divorced for over 10 years can she collect off his social security as a former spouse he is remarried but she has not does this affect her collecting on his account so social security? The first key is that they have to have been married for 10 years as long as they were married for over oh yeah married for over 20 years she said that all right and she cannot be remarried so if we have  so we’re talking about social security here and let’s say we have husband and wife they get divorced a husband gets new wife then the ex-spouse she can make a claim on husband’s social security the fact that he remarried or anything has no effect on her social security  so she should be able to comply or complain make a claim on his social security and what I would do is I would just contact social security directly and they can calculate them out this should be entitled to what is difference between a sap and a 401k 401k 401k is typically going to be an employer-sponsored plan. 

They fall under different tax codes accept and I’ll have to double check this this is going to fall more into the IRA side of things, if you’re concerned about asset protection. 

So it’s going to differ from a 401k with regards to the asset protection but both of them typically are going to be pre-tax accounts another question can you refinance a home once it’s deeded to the Castle Trust the answer is yes you can in fact the language in the castle trust specifically allows you to do that the only thing that you have to do and we’ve partnered with some companies that can do this is you need to make sure that the mortgage company will refinance inside of the trust because every mortgage company has its own private entity and they can choose kind of what they want to deal with or not some of them just don’t want the hassle of dealing with a trust but we do have firms that will help you refinance inside of a trust. Okay, so any other questions please go ahead and put them in now otherwise looks like still a beautiful yet cloudy day you can get out and enjoy some weather so if you do have any more questions. 

Alright, here’s the goal over to is to be able to make backdoor Roth contributions without needing to pay any income tax on those contributions conversions since there would be no other IRA thereby avoiding pro-rata calculation of taxes due on the back door Roth contributions,  that’ll be a more detailed answer that I’d have to get into, my feeling is that you could do that inside of an IRA you just have to split the accounts but yeah that’s kind of a detailed very detailed strategy. So probably more than we want to get into on this anything else any other questions coming in that I can answer on the fly? Victoria writes in glad to have you back thank you so much it’s good to be back and back in the saddle so with that thank you everyone if you do have additional questions feel free to submit those for next week if you want to see how any of this applies to your information feel free or your situation feel free to shoot us an email or feel free to book some time on the calendar. Thank you. 

Thank you so much alright, well take care, make it a great week and I’ll talk to you next week!


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