In June 2014, the Supreme Court reached a landmark decision in
Clark v. Rameker. In the case, the Supreme Court ruled that inherited IRAs do not count as
protected retirement funds. In effect, inherited IRAs can be used to satisfy
creditors’ claims when the beneficiary decides to file bankruptcy.
Clark v. Rameker, Heidi Heffron-Clark had inherited a $300,000 IRA from her mother in 2001.
Hefron-Clark argued that the IRA was a “protected retirement account,”
and therefore exempt from creditor claims in the bankruptcy she and her
husband filed together in 2010.
Because the tax laws regarding inherited IRAs required that Heffron-Clark
withdraw a minimum amount of money annually from the IRA, despite the
fact that she had not reached retirement age, the Supreme Court decided
that the account did not qualify as a “protected retirement fund”
because that’s not how she was using the account.
Inherited IRAs in Bankruptcy Cases
What does the
Clark v. Rameker decision have to do with everybody else? A lot. Since the Supreme Court’s
ruling, if a beneficiary decides to file bankruptcy, their inherited IRAs
will be subject to creditors’ claims – they are now considered
assets. So, if you plan on leaving your IRA to your son or daughter or
grandchild, be aware that the IRA is not protected anymore. If your beneficiary
decides to file bankruptcy, the funds in the IRA can be used to satisfy
“What can I do? Are there any alternatives?” Fortunately, there
is something you can do to protect the funds in an IRA. In order to protect
an IRA from a beneficiary’s creditors, you can establish a
standalone retirement trust, which will do the following: 1) allow your beneficiary to access the funds,
and 2) protect the assets from the beneficiary’s creditors.
To learn more about keeping inherited IRAs safe from creditors,
contact my Nashville estate planning firm to make an appointment and discuss your options.