Inherited IRA’s Are No longer Protected in Bankruptcy

Yet another reason to have a living trust:  inherited IRA’s are no longer protected in bankruptcy court. Clark v. Rameker.  In this case, the United States Supreme Court ruled that “the retirement funds exemption should not be read to convert the bankruptcy objective of protecting debtors’ basic needs into a free pass for a debtor how inherits the funds.”  http://www.supremecourt.gov/opinions/13pdf/13-299_6k4c.pdf 

The Clark v. Rameker decision means that, in the case of bankrupt estates, inherited IRAs will now be considered assets that are fully available to satisfy creditors’ claims. If you pass a retirement fund down to a child or grandchild, that inherited money will no longer be protected if your beneficiary must file for bankruptcy.  With a little prior proper estate planning, the inherited IRA can become protected again.  If the beneficiary of the IRA was not a person (debtor) filing for (or in the midst of) bankruptcy, but instead, a certain type of trust, it would enable the trust to protect the asset from the debtor’s bankruptcy trustee.  Make sure your children’s inheritance is protected, meet with an estate planning attorney!  We address these issues on a daily basis and have numerous tools to help protect your estate.