In a recent United States Supreme Court decision, the Court unanimously found that IRAs that are inherited are not protected from creditors in a bankruptcy proceeding because they are not considered “retirement funds” as interpreted by the Bankruptcy Code.
In the case, CLARK V. RAMEKER, an individual inherited an IRA from her mother and later filed for bankruptcy. At the time she filed for bankruptcy, the IRA had roughly $300,000.00 remaining. Typically, when filing for bankruptcy, certain assets are considered exempt, including retirement funds. However, until this case was decided it was unclear whether an IRA which is inherited receives the same protection as an IRA that is still held by the original contributor. To the detriment of the IRA beneficiary, the United States Supreme Court found that inherited IRAs do not have the same protections.
For most individuals who are beneficiaries of an IRA this never becomes a problem, so long as they do not declare bankruptcy. However, because the future is always uncertain, leaving an IRA to a trust for the benefit of your beneficiary may be a prudent planning technique, particularly for those who have large retirement accounts. Speak to an estate planning attorney in your area to obtain more information.