Inherited IRA’s No Longer Protected from Creditors

tax returnsOne of the benefits of having an IRA is that they are protected from creditor claims because they are retirement accounts. This is a good thing for people who are in professions that could have a liability concern. However, a recent ruling by the Supreme Court could cause a problem if the IRA’s you own are inherited.  The ruling states that inherited IRAs are not considered protected retirement funds—and are thus subject to creditors’ claims if the beneficiary files for bankruptcy.

This stems from the case of Clark v. Rameker, Heidi Heffron-Clark. In this case, the defendant argued that a $300,000 IRA she inherited from her mother in 2001 qualified as a protected retirement account.  With that in mind, the account should be exempt from the claims of creditors after she and her husband filed for bankruptcy in 2010. Under U.S. tax code regarding inherited IRAs, Heffron-Clark was required to withdraw a minimum amount of money from the account each year, even though she is not yet retirement age. Given this, the court decided the account was not a protected retirement fund because the beneficiary wasn’t using it as one.

What does this mean for you?

The Supreme Court’s decision means that if an estate is bankrupt, inherited IRAs will now be considered assets that can be utilized to satisfy creditors’ claims. With that in mind, if a retirement fund is inherited the money will no longer be protected if the beneficiary files for bankruptcy.                

How do you avoid this?

We suggest creating an estate plan to ensure that inherited IRAs are safe from creditors. In most cases, establishing a trust as the beneficiary of the IRA rather than the family member will give an IRA protection from creditors. For more information on how to properly handle this or to discuss how to create a trust to protect your assets from creditors, contact the professionals at Financial Fiduciaries.

 

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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