Jobe Dupre’, CPA

It is now official that inherited IRAs are not considered “retirement funds” within the meaning of federal bankruptcy law and therefore are not exempt from a bankruptcy estate. This ruling was handed down by the Supreme Court in the case of Clark, et ux v. Rameker on June 12, 2014.

Typically, retirement funds (IRAs and Roth IRAs) are exempt from a bankruptcy estate and therefore shielded from creditors in bankruptcy. This was done to help debtors to provide for their retirement, even after bankruptcy. However, the Supreme Court ruled that inherited IRAs do not qualify as retirement funds.

The court defined retirement funds as funds “set aside for the day an individual stops working” and there were three legal characteristics of an inherited IRA that led the Court to determine that they are not considered “Retirement Funds”:

1. A holder in an inherited IRA cannot invest additional money into the account;
2. Holders of inherited IRA’s are required to withdraw money from such accounts no matter how many years the holder may be from retirement; and
3. The holder of an inherited IRA can withdraw the entire balance in the account at any time for any purpose without incurring a penalty.

This Supreme Court ruling brings about a harsh reminder that credit protection is very important and should be a key factor when determining how the monies in an IRA are passed on to your beneficiaries. One way to obtain this protection from creditors is to form a trust and have the trust be the beneficiary of the IRA. There are a number of trusts out there that can accomplish this goal and they can be customized to your needs as these trusts are not a one-size-fits-all approach.

So, if you have an inherited IRA, are concerned about creditor protection, and have any questions please do not hesitate to give us a call. We will be glad to answer questions and point you in the right direction.