A recent ruling by the Supreme Court in the case of Clark v. Rameker determined that inherited IRAs are not allowed to be considered exempt property when the owner is filing bankruptcy. While both federal and California codes allow for exemptions as they apply to retirement accounts in most cases, inherited IRAs do not necessarily meet this standard. The reasoning was explained by Justice Sotomayor as part of her explanation
included an important statement, specifically "Inherited IRAs do not operate like ordinary IRAs. Unlike with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, without paying a tax penalty."
Inherited IRAs as a Non-Spouse
Generally when one spouse is deceased, the other spouse may roll over the inherited IRA and treat it as if it were their own IRA and take distributions accordingly. However, anyone other than the spouse does not have this flexibility; they must begin taking withdrawals as per the rules that apply to beneficiaries which includes beginning to withdraw a minimum amount every year beginning no later than December 31 of the year the original owner was deceased.
When California Inherited IRA's Are Exempt From Bankruptcy Trustee Reach
Under California bankruptcy rules, those who are filing have no election to use federal exemptions. Currently, the statutes that govern bankruptcy protection for IRA accounts can be found in CAL. CCP. CODE § 704.115 which specifically addresses retirement accounts and may allow California bankruptcy filers to keep inherited IRAs safe. More specifically, section B states"All amounts held, controlled, or in process of distribution by a private retirement plan, for the payment of benefits as an annuity, pension, retirement allowance, disability payment, or death benefit from a private retirement plan are exempt."
What Does this Mean for Inherited IRAs?
Currently since California exemptions include many types of IRA accounts to be considered exempt property there may be no issues. However, there is a broad sense that California may follow the Supreme Court in this ruling.
What Options are Available?
Working with an estate planning attorney may be necessary to work around these rules. One of the options is to put a trust in place to receive IRA accounts for specific beneficiaries upon the death of the account holder.
If you have a family member who you are considering leaving your IRA accounts to that is not a spouse, you may wish to review your estate planning with an attorney who is qualified to deal with these new rulings contact the Law Offices of James C. Shields for additional information or assistance.