One 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.