This supreme court decision made Inherited IRAs fair game in Bankruptcy:
In Clark v. Rameker, Heidi Heffron-Clark inherited an IRA from her mother. She received distributions from that inherited IRA for several years before filing Chapter 7 bankruptcy. Ms. Heffron-Clark relied on the Bankruptcy Code, which states that IRAs are exempt up to $1.245 million from bankruptcy, to claim that her inherited IRA qualified for the retirement account exemption.
In a unanimous ruling, the Supreme Court disagreed, distinguishing inherited IRAs from other IRAs established by an individual for his or her own retirement. Because the beneficiary of an inherited IRA cannot make contributions to that IRA, an inherited IRA does not provide any tax incentives, which is an important purpose of other IRAs. Since the beneficiary of an inherited IRA has different rules for taking distributions than other IRA owners, this also establishes inherited IRAs as different from other IRAs. These differences, the Court reasoned, are enough to disqualify an inherited IRA from qualifying for the federal bankruptcy exemption.
Even though some states offer protection for inherited IRAs in bankruptcy, a move to another state that does not offer this protection can endanger inherited IRA assets. IRA owners who wish to provide their heirs with valuable protection should consider naming a trust as beneficiary of IRA assets instead of heirs, who could instead be designated as beneficiaries of that trust.
The Court did not address spousal inherited IRA beneficiaries; however, since a spouse is allowed to roll over an inherited IRA into his or her own account, this may qualify a spousal inherited IRA for the bankruptcy exemption for retirement funds.
While nobody wants or expects a bankruptcy, we can help plan for these types of contingencies. Call Pierchoski Estate Law at 931.363.7222 for help.
A Note from the Attorney, Stan Pierchoski:
The practice of law is a second career for me. After obtaining Master of Science degrees in both Nuclear and Mechanical Engineering, I worked in the Nuclear Power Industry for 15 years. Always having an interest in law, I attended and graduated from law school and founded the Pierchoski Law Firm in 2002 in Pulaski, TN. For several years I practiced as a criminal defense, trial attorney. After my parents passed I became interested in Trust and Estate Law and felt a strong calling to change my practice to the Estate Planning area.
For years I have been exclusively doing trust writing and wealth planning and have become proficient at it. Over the last several years my practice has evolved to serve all age groups including elders and Medicaid Planning. I am always open to your questions and am more than happy to chat with you about your concerns so give me a call or stop by my office. You’ll be glad you did!