IRAs No Longer Protected from Bankruptcy

A June 2014 United States Supreme Court ruling (Clark v Rameker) has addressed and more clearly defined the differences and rights associated with Regular (or Roth) and inherited Independent Retirement Accounts. The debate begin in October of 2010 when Heidi and husband Brandon filed for bankruptcy and claimed the inherited IRA which came from Heidi’s mother, worth 300,000 dollars, as exempt from collections. Refuted by bankruptcy trustees and creditors, the case quickly made its way through the court system and soon reached the Supreme Court.

An inherited IRA is innately different than a Traditional or Roth IRA in the sense that it is received all at once (and in the case of the Clarks, can be withdrawn all at once as well- having no limitations set in place upon receiving the inheritance) while the latter are built and contributed to over a lifetime. The Supreme Court unanimously ruled that because of this very matter, an inherited IRA is no longer protected and is “an opportunity for current consumption, not a fund of retirement savings.” Meaning that these IRAs are now considered an asset when bankruptcy is filed, making it even more important to know you legal rights, and safeguard existing IRAs through stand alone IRA beneficiary trusts.

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With this recent ruling, it is now more pressing than ever to investigate your options with your estate planning attorney and protect the assets you intend to leave to your children and others from being lost by them in a bankruptcy years down the road!  It is unlikely that Heidi’s mother would be happy to know that a good portion of what she worked so hard for is subject to her daughter and son-in-law’s bankruptcy.  It does not have to be that way.