While the dispute over inherited IRAs has not arisen often, it may crop up more in the future.
By Stephen K Lehnardt
Does an "inherited" retirement account remain a retirement account for the intended heir? This may sound like a rhetorical question, but it is currently before the U.S. Supreme Court in the matter of Clark et ux. V. Rameker et al.The decision could have important consequences for those who are looking to leave an IRA to their heirs – and NOT to the heir's creditors.
This issue was explored by Reuters in a recent article titled “U.S. high court to chart fate of inherited IRAs in bankruptcy.”
Mrs. Clark inherited a $300,000 IRA from her mother. and then went into bankruptcy to the tune of some $700,000. Consequently, when the bankruptcy trustee became mighty interested in the IRA, and the Clarks cried foul. As a general rule, IRAs are exempt from many bankruptcy proceedings of the account owner. Some courts have upheld this protection even when the account is inherited by one who is not yet a retiree and is not the account owner, but still complies with the strict distribution requirements for inherited IRAs.
Other courts have been less favorable and now it is up to the highest court to resolve conflicting case law on the matter.
It may seem strange to think about bankruptcy when planning for the eventual distribution of your IRA to heirs. After all, leaving your heirs behind is one thing, but ensuring that they are protected is a still greater step.
The bottom line: Sometimes keeping your planning “simple” creates complicated consequences for your heirs.
For more information in Liberty, MO and the Kansas City Area about protecting inheritances from bankruptcy and other creditors, and to access free information and tools to organize your estate, visit our estate planning website.
Reference: Reuters (November 26, 2013) “U.S. high court to chart fate of inherited IRAs in bankruptcy”