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Supreme Court Ruling That Inherited IRA's Are Available To Creditors In Bankruptcy May Cause You to Rethink Inheritable Assets

A 2014 ruling by the US Supreme Court should give serious pause to anyone considering using inheritable IRAs as a multi-generational wealth protection strategy. 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unlike the IRA originator, the inheritor does the inheritor face any penalties or limitations on what funds can be withdrawn at what time, or what the funds may be used for.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 specialist.

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 your family.