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Is an Inherited IRA Protected from Creditors?

If you intend to create an estate plan, one which leaves assets to your children, grandchildren, or other beneficiaries, you probably prefer to see those assets go directly to your beneficiaries and not to their creditors. That said, are inherited IRAs protected from your beneficiary’s creditors? As of June 2014, not anymore.

In June of 2014, the Supreme Court ruled that inherited IRAs are no longer protected from creditors when beneficiaries file for bankruptcy. In Clark v. Rameker, Heidi Heffron-Clark had filed bankruptcy with her husband in 2010. In the case, Heffron-Clark argued that the $300 IRA she inherited from her mother nine years prior to filing bankruptcy was a “protected retirement account.”

Under the U.S. tax code addressing inherited IRAs, on an annual basis, Heffron-Clark was required to withdraw a minimum amount of money from the IRA despite the fact that she had not reached retirement age. Since Heffron-Clark was not using the IRA as a retirement account, the Supreme Court decided that inherited IRAs are no longer protected from creditors in a bankruptcy action.

Inherited IRAs and Bankruptcy Estates

What does the Clark v. Rameker have to do with our estate planning clients? Essentially, if they decide to leave an IRA to a beneficiary, they must be aware that if the beneficiary files for bankruptcy after inheriting the account, the IRA will be 100% accessible to pay off creditors’ claims. So, is there any way to shield an inherited IRA? The good news is that with careful estate planning, you can protect an IRA from satisfying creditors’ claims in bankruptcy. To do this, you can establish a standalone retirement trust, which can protect the IRA without affecting the beneficiary’s access to the funds.

To learn about protecting inherited IRAs from creditors in the Inland Empire and Mission Viejo, contact our firm to meet with a Rancho Cucamonga estate planning lawyer.