U.S. Supreme Court Denies Bankruptcy Protection To Inherited IRAs

(I apologize for hot having posted for awhile ... it's been rather busy!)

In a 9-0 opinion issued today, June 12, 2014, the U.S. Supreme Court ruled that an inherited IRA is not an exempt asset for purposes of the federal Bankruptcy Code (11 U. S. C. §522(b)(3)(C)).  The court held that a traditional or Roth IRA is exempt from bankruptcy because, under the statute, a true retirement fund is intended to provide the account owner with a source of funds for sustenance "to provide for their basic needs during their retirement years." 

In contrast, the Court ruled that an inherited IRA has a number of characteristics that differentiate it from a traditional IRA, particularly the requirement that withdrawals from an inherited IRA must begin no later than the year after the original account owner's death, "no matter how far [the inheriting beneficiary] is from retirement."

For the past couple of years we have been recommending to our clients with large retirement accounts (i.e., in excess of $250,000) that they consider using a "stand-alone retirement trust" as a beneficiary of their retirement accounts, rather than having children or other beneficiaries inherit the IRA in their own names.  One reason for that recommendation has been out of a concern as to how accessible the IRA might be for the creditors of those who will inherit a decedent's retirement account.  After today's Supreme Court decision, our concern has proven to be justified, and the use of stand-alone retirement trusts will be more important than ever.