Should You Consider Setting Up a Stand-Alone Retirement Plan Trust to Protect Your Children?

Retirement accounts are often among the largest assets a family leaves behind. Many parents assume that naming a child as beneficiary of an IRA or other retirement account automatically ensures those funds will be protected and used for long-term financial security.

In California, that assumption can be dangerously incorrect.

Inherited IRAs occupy an unusual and often misunderstood position in both federal bankruptcy law and California creditor-protection law. As a result, children and other non-spouse beneficiaries may find inherited retirement assets exposed to lawsuits, judgments, divorces, or even bankruptcy. For families concerned about asset protection, a stand-alone retirement plan trust (sometimes called a beneficiary retirement trust or IRA trust) is often a critical planning tool.

Below is an overview of how inherited IRAs are treated under current law and why proactive planning matters.

Federal Bankruptcy Law: Why Inherited IRAs Are Not Protected

At the federal level, the U.S. Supreme Court definitively addressed inherited IRAs in Clark v. Rameker (2014). The Court held that inherited IRAs are not “retirement funds” for purposes of the federal bankruptcy exemption.

The Court focused on three characteristics that distinguish inherited IRAs from traditional retirement accounts:

• Beneficiaries cannot contribute additional funds to an inherited IRA.
• Required distributions are not tied to the beneficiary’s retirement age.
• Beneficiaries may withdraw the entire account balance at any time without penalty.

Because of these features, inherited IRAs function more like inherited investment accounts than retirement savings. As a result:

• Inherited IRAs do not qualify for the federal retirement exemption in bankruptcy.
• They are generally included in the debtor-beneficiary’s bankruptcy estate.
• Creditors may use inherited IRA assets to satisfy debts.

The Spousal Exception

Spouses are treated differently. A surviving spouse may roll an inherited IRA into their own IRA. If done correctly, the account becomes a traditional IRA again and typically regains full bankruptcy exemption protection. This option is not available to non-spouse beneficiaries.

California Law: Creditor Protection Outside Bankruptcy Is Limited

Under California law (Cal. Code Civ. Proc. § 704.115), state courts apply a “reasonably necessary for retirement” standard when considering whether IRAs (including traditional, Roth, and self-directed IRAs) are exempt from creditor claims outside of bankruptcy. This means:

• IRAs may receive creditor protection only to the extent that a court determines the funds are reasonably necessary to support the debtor in retirement.
• This protection is judge-discretionary, not automatic, and subject to the debtor’s overall financial situation.

Inherited IRAs under California creditor law:

• Cases and commentary indicate inherited IRAs do not receive the same level of protection as employer-sponsored plans (e.g., 401(k)s) once distributions occur.
• Because inherited IRAs have features that make them more like general assets (e.g., required distributions and withdrawal flexibility), California courts are likely to treat them as subject to creditor claims unless the beneficiary can establish, they are necessary for retirement.

There is no specific California statute that explicitly and automatically exempts inherited IRAs from creditor claims the way some the other states may.

How California Compares to Other States

Several states, including Texas, Florida, Arizona, Ohio, Missouri, North Carolina, Idaho, and Alaska, have enacted statutes that expressly protect inherited IRAs from creditor claims.

California has not.

Instead, inherited IRAs in California are governed by:

• The discretionary “reasonably necessary for retirement” exemption (if it applies at all); and
• A case-by-case creditor analysis.

For beneficiaries with significant income, other assets, or creditor exposure, inherited IRAs are often reachable by creditors.

Practical Consequences for California Beneficiaries

Bankruptcy Context (Federal Law)

• Standard inherited IRAs do not enjoy federal bankruptcy exemption.
• Unless a beneficiary is a spouse and performs a rollover, the inherited IRA enters the bankruptcy estate.

Non-Bankruptcy Creditor Context (State Law)

• California courts use the “reasonably necessary for retirement” standard.
• Inherited IRAs may not receive full protection, and courts may allow creditors access if the beneficiary has other assets.

Important Distinction: Employer Plans

Assets held in employer-sponsored ERISA plans, such as 401(k)s, generally receive robust federal creditor protection while they remain in the plan. However, once assets are distributed or rolled into an IRA, those protections can be significantly reduced, especially for inherited accounts.

Summary — Inherited IRA Exemption Status (2026)

Planning Considerations: How a Stand-Alone Retirement Plan Trust Helps

Because inherited IRAs are vulnerable:

• Beneficiary Retirement Plan Trusts (e.g., Stand-Alone Retirement Trusts, also known as IRA Trusts) are commonly used to help protect inherited retirement assets from creditors (especially for non-spouse beneficiaries). The retirement plan owner sets the trust up during their lifetime and upon death, the plan assets flow through the trust in a way that protects those funds from the creditor claims of the beneficiary.
• A properly drafted retirement plan trust can prevent the beneficiary’s personal creditors from reaching IRA assets because the beneficiary does not hold legal or equitable title to the trust assets.
• Spousal Rollovers can convert inherited IRAs into the spouse’s own IRA, restoring full creditor protection under federal and state law.
• Distribution Timing: Because distributions ultimately remove funds from retirement account protections, careful planning is required to minimize exposure.

If your goal is to ensure that retirement assets benefit your children, rather than their creditors, a stand-alone retirement plan trust is often not just advisable, but essential.

Proper planning must occur before death, and the trust must be carefully coordinated with beneficiary designations and retirement account rules. For many families, this planning step can mean the difference between long-term financial security and unintended asset loss.

If you, a friend, or a loved one needs help establishing or updating an estate plan or discussing a stand-alone retirement plan trust, we’re here to help. Contact our Intake Department at 760-448-2220 or visit us online at www.geigerlawoffice.com/contact.cfm. We proudly serve families across California from our offices in Carlsbad (San Diego County) and Laguna Niguel (Orange County).