IRAs Paid to Revocable Trusts

Take-Away: If an IRA is made payable to the settlor’s revocable trust, the IRA may be available to satisfy the deceased settlor’s creditor claims or expenses of probate administration.

Background: The Michigan Trust Code adopts two separate provisions to deal with using a revocable trust’s assets to pay the claims of the deceased settlor.

MCL 700.7506(1)(b): This section provides that whether or not the terms of a trust contain a spendthrift provision, the following rule applies:

(b)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 at the settlor’s death was revocable by the settlor, either alone or in conjunction with another person, is subject to expenses, claims, and allowances as provided in section 7605.”

MCL 700.7605: This section parallels section 7506 in that it provides that the property of the trust over which the settlor has the right, without regard to the settlor’s mental capacity, at his/her death either alone or in conjunction with another person, to revoke the trust and revert the principal in himself or herself is subject, to the extent the probate estate is insufficient, to satisfy the following; (i) administration expenses of the estate; (ii) homestead, family and exempt property allowances; and (iii) enforceable and timely presented claims of a creditor of the settlor.

However, a trust that established as part of an IRA established under IRC 408, i.e. an IRA Trust,  is not to be considered to be a trust that is described in section 7605.

The Reporter’s Comments to MCL 700.7605 suggest that some assets that are payable to the revocable trust by beneficiary designation may also be protected if they are exempt from creditor claims  under other statutes:

“Life insurance proceeds paid directly to the trustee of the revocable trust pursuant to a beneficiary designation also may be exempted. See MCL 500.2207. Retirement plan benefits paid to the revocable trust or to other named beneficiaries may be exempted by MCL 600.6023(1)(k).” 

Note, though, that the exemption from creditor claims for IRAs is found at MCL 600.6023(1)(j), not MCL 600.6023(1)(k). The IRA exemption provides that IRAs under IRC 408 and 408A and the payments or distributions from the account are exempt.

Question: So the question is whether the payment or distributions from the deceased settlor’s IRA made payable to the settlor’s once-revocable trust are also exempt from levy and attachment to satisfy claims against the settlor’s estate if that estate is insolvent?

Sarhan v Markoul (In re John Markoul Living Trust) No. 316892 (Michigan Court of Appeals) (2015): In this fairly recent Michigan Court of Appeals case the validity of a claim for exempt property brought with respect to a decedent’s revocable, living trust, the Court held that MCL 700.7605(1) “applies only to trusts that remain revocable at death..and the trust in this case became irrevocable on death” in effect sheltering the exempt property from the creditor’s claim.

The Reporter’sComments to MCL 700.7605(1) and this Michigan Court of Appeals decision is not so generous: “The court of appeals interpretation of the trust and statute is highly questionable and, in the Reporter’s opinion, a flagrant error and misreading of the statute. Under the court’s interpretation, the revocable, living trusts in widespread use as estate planning devices and will substitutes will never be subject to expenses, claims, and allowances in clear contravention of long-standing law and the intentions of the drafters of the MTC.”

There there is another opinion with regard to IRAs payable to a revocable trust.

Commerce Bank N.A v Bolander, 239 P3d 83 (2007): An earlier case where the IRA was not protected was this decision from the Kansas Court of Appeals. There, Wanda borrowed $80,000 from the Bank. On Wanda’s death she had two IRAs (aggregating $212,000) payable to her revocable trust. Wanda’s estate was insolvent. The Bank sued to attach the assets held in Wanda’s trust, i.e. the two IRAs, to satisfy its judgment on Wanda’s unpaid promissory note. Both the trial court and the appellate courts authorized the attachment of Wanda’s IRAs to satisfy the Bank’s judgment. Key points in that decision were:

If Wanda’s  IRA accounts were payable to her revocable trust, then the funds paid from the IRAs to that trust after Wanda’s death are subject to creditor claims under Kansas’ version (like Michigan’s) of the Uniform Trust Code;

Any creditor’s rights exemptions that applied to Wanda’s IRAs during her lifetime do not survive her death;

The fact that Wanda’s revocable trust became irrevocable upon her death was not relevant with respect Kansas’s exempt property statute;

In the absence of a specific provision in the exemption statute granted to a debtor like Wanda, a personal exemption does not survive her death.

Conclusion: As was mentioned in an earlier missive, the part of the Michigan exempt property statute that protects not only the IRA itself but also payments and distributions from the account could be interpreted to cover not only inherited IRAs but it also could protect the proceeds distributed from the decedent’s IRA to the decedent’s revocable trust, which becomes irrevocable on the decedent’s death. Perhaps the Michigan Trust Code needs to be clarified;  if property owned by an individual was exempt while alive, is that exemption lost once the individual dies, as the Kansas court concluded?