Legal Blog

The Weekly Scenario from Steve Shane – 1.13.14

Question:  Are inherited IRAs protected from creditor claims? Answer:  Suppose Jane dies and her IRA passes to her son Jim. If Jim files for bankruptcy or owes a judgment award from a lawsuit, is Jim going to be able to keep the inherited IRA?  What if Jim, who inherited the same IRA from Jane, is sued and a judgment is rendered against him? [Note that an inherited IRA is, as the name suggests, an IRA that is not the individual’s own retirement account; rather it is someone else’s retirement account which one receives by way of inheritance]. I have reviewed a number of court decisions on this topic and the decisions vary. Inherited IRAs seem to be given different treatment than regular IRAs as a number of courts view an IRA that passes to a beneficiary as no longer a true ‘retirement’ fund of that individual and therefore loses its protection from the claims of creditors in a bankruptcy case.  In fact, one high court, in ruling in favor of the creditor, noted that its decision would cover a non-spousal inherited IRA, but perhaps not if the IRA was inherited from a spouse. Because of the divergence in court opinion, the answer appears to be that the inherited IRA in bankruptcy cases will depend on where a debtor resides.  This ultimate answer may actually depend on a case that may be heard by the Supreme Court in 2014 (will have to keep you posted). In non-bankruptcy cases, the answer is a matter of state law.  Some states have specific statutory protections for inherited IRAs and some states tend to be silent on the issue. Comment:  A possible solution to obtain better creditor protection is to name an irrevocable trust as the beneficiary of such IRA benefits. Of course, this could have other impacts on the plan, particularly from an income tax standpoint, but if creditor protection is an important goal, it should be something addressed in the planning. Steven E. Shane Principal Offit│Kurman Attorneys At Law 301.575.0313 Washington 410.218.9339 Mobile 301.575.0335 Facsimile Please note the above material discussed is intended to provide only general information. Do not, under any circumstances, solely rely on this information as legal advice. Legal matters are often complicated. For assistance with your specific legal problem or inquiry please contact me directly.