A 2014 ruling by the US Supreme Court should give serious pause to anyone
considering using inheritable IRAs as a multi-generational wealth protection
While Individual Retirement Funds were once considered a safe, separate
individual asset that could not be liquidated to satisfy debtors in a bankruptcy proceeding,
the Court ruled that it is no longer the case for funds in an inherited IRA.
Federal bankruptcy code specifically excludes from bankruptcy liquidation
any funds set aside by an individual taxpayer into an IRA for their personal
retirement needs as specified in federal tax code. Those funds that are
in a fund originated, owned, and funded by an individual for their personal
retirement needs are exempt from bankruptcy actions.
However, in the case of
Clark v. Rameker, the Court ruled that an inherited IRA or other retirement fund –
a fund originated and funded by another individual – does not meet
the specific, narrow definition of a personal retirement account. The
Court’s ruling was based on the fact that unlike a personal account
set up by an individual for their retirement, an inherited account does
not contain funds deposited into the account by the account originator
for their retirement needs. In addition, unlike the IRA originator, the
inheritor does the inheritor face any penalties or limitations on what
funds can be withdrawn at what time, or what the funds may be used for.
According to the court, these differences in how the funds originated
and how they may be used meant that by definition such accounts were not
truly ‘retirement’ accounts and were not protected by laws
designed to protect such accounts from bankruptcy liquidation.
It is important to note that this ruling applies only to IRAs inherited
by someone other than the spouse of the IRA owner and originator. For
instance, if a wife inherits her husband’s IRA, it still be held
separate and distinct from any assets considered for bankruptcy liquidation,
while a child or sibling beneficiary of an inherited IRA would not enjoy
that same protection.
This ruling has led many to re-think the traditional IRA structure and
look towards other options, such as trusts. However,
knowing which structure is best for which individual is a complicated process that should not be undertaken without the advice of retirement planning
Establishing inheritable assets and protecting them for future generations
is serious business. You need an experienced legal team that can plan
for the future so that your children – and their children –
can benefit from sound financial planning that can protect family wealth
for multiple generations.
Contact us today for more information on developing a sound financial strategy for