Supreme Court Case Puts Inherited IRAs at Risk | Massachusetts Asset Protection Attorney
A landmark case before the U.S. Supreme Court holds that Inherited IRAs are not protected from creditors. One June 12, 2014 the U.S. Supreme Court handed down its opinion in Clark v. Rameker, which questioned whether or not an inherited IRA could be shielded from Bankruptcy. Heidi Heffron-Clark inherited an IRA from her mother in 2001 and filed bankruptcy 9 years later, the question was whether she could keep the assets held in the IRA.
The Court unanimously held that retirement funds inherited by a beneficiary from the original plan participant are not considered to be “retirement funds” within the meaning of the federal bankruptcy exemptions found at 11 U.S.C. §522(b)(3)(c).
A clear legal distinction was drawn between an inherited IRAs and those that you set up for yourself. An inherited IRA has several unique features that suggest they are not retirement assets, which were noted by the Court. Unlike IRA owners, inheritors can’t add additional funds to the account, but they can take out money at any time without penalty. Usually a participant’s own IRA is subject to early withdrawal penalties if taken out early, unlike an Inherited one. Generally, non-spousal beneficiaries of an IRA must either withdraw the entire amount within five years of the original owner’s date of death, or take out a minimum amount each year, starting by December 31 of the year after the date of death. This is true for both Roth and Traditional IRAs.
What You Can Do To Protect The Inheritance For Your Beneficiaries:
The upshot is that Clark v. Rameker argues very strongly in favor of setting aside retirement accounts that will pass upon the death of the plan participant into a special type of trust designed to both protect inheritances from future creditors of the beneficiary, but also to ensure that the trust will qualify as a Designated Beneficiary under the Internal Revenue Code.
A Retirement Plan Trust can be created to protect all of your inheritable retirement accounts. In creating this type of trust, you are using the trust as your beneficiary instead of the individual. The beneficiary of the trust will be the original individual you wanted to benefit from your protected retirement account. This is what many would call a “work around”, which is possible even with the new supreme court case.
For more information on how to protect your IRAs, click here to download our Free Report on the IRA Protection and Maximization Trust.
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