Inherited IRAs Not Exempt From Bankruptcy Proceedings
Tuesday, July 8, 2014 at 2:35PM
Admin in General Business, IRA, Kira S. Masteller, Trusts and Estate Planning, inheritance, spendthrift trust, trusts

Trusts & Estate Planning Attorney

by Kira S. Masteller
818.907.3244

 

Individual Retirement Accounts or IRAs, are retirement funds – at least until you pass the asset on to heirs other than your spouse. Then, according to a recent decision handed down by the Supreme Court, they become fair game for creditors.

The case at issue was Clark v. Rameker. Heidi Heffron-Clark and her husband Brandon Clark declared Chapter 7 Bankruptcy in 2010, and listed a $300K IRA inherited from Heffron-Clark's mother in 2001, as a primary asset exempt from the bankruptcy estate. The bankruptcy trustee, William Rameker, maintained that the funds in the account did not qualify as retirement funds and should be used to pay off about $700K of the Clarks' debts. The Bankruptcy Court agreed with the trustee.

A District Court reversed the decision though, citing that the exemption covered any account in which the funds were originally accumulated for retirement purposes, and a Seventh Circuit Court reversed the District Court's opinion.

Nine Said No: Supreme Court Justices Unanimously Decide Inherited IRAs Not Protected

When the Seventh Circuit sided with the Bankruptcy Court, the Clarks petitioned the Supreme Court.  Justice Sonia J. Sotomayor delivered the opinion that inherited IRAs do not count as retirement funds because:  

1. Bankruptcy code is written to ensure creditors recover losses but also to ensure debtors can meet their essential needs. Inherited IRAs do not fall in the category of an essential need; and

2. Inherited IRAs cannot prevent the heir from blowing the entire balance on luxuries or non-essential needs.

So where does this leave you and your IRA?

Spendthrift Trusts Protect Assets

When considering your assets and who's going to get them when you pass, think about how best to give your heirs the most benefit while minimizing risk of loss. Most of you would rather see your money go to your designated beneficiaries rather than credit card companies or Uncle Sam.

A spendthrift trust will limit your beneficiary's access to the principal – but it also limits his/her creditors' access to the funds. Instead of direct access to all of the money at any given time, you could ensure your heir gets regular payments, or certain goods/services purchased by the Trustee.

Which beneficiaries will most benefit from this type of trust? Consider the heirs that are:

1. Prone to addictions

2. Generally bad with money

3. Prone to fraud

4. Engaged in a business venture with a high potential for failing

5. Overextended with credit

If you need further information regarding managing your IRA, spendthrift trusts or other estate planning matters, contact me directly. 

Kira S. Masteller is a Trusts and Estate Planning Attorney at our firm. Contact her via email: kmasteller@lewitthackman.com, or by phone: 818.907.3244.

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