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Are Inherited IRAs Shielded from Creditors?

Nashville Blog 2017 November Are Inherited IRAs Shielded from Creditors?
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Are Inherited IRAs Shielded from Creditors?

Posted By David Whittaker, Attorney at Law || 2-Nov-2017

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.

In 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 creditors’ claims.

“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.

Categories: Inheritance, Estate Planning, Inherited IRAs

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David Whittaker, Attorney at Law

Call Today: (888) 492-4735

David Whittaker, Attorney at Law - Nashville Probate Attorney
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