Money you’ve saved up for retirement and haven’t used can be given to your beneficiaries after your death. Among the retirement accounts you may have are IRAs (or Individual Retirement Accounts).
When people bequeath an IRA to their non-spousal beneficiaries, both they and their beneficiaries often assume that the contents of the inherited IRA will be protected from creditors. If you’re planning to leave an IRA to your beneficiaries, and you know they’re having some financial struggles, this exemption from creditors’ claims may be a comfort both to you and to them, to know that the money in the account is generally secure.
But is an inherited IRA really protected from creditors?
A recent US Supreme Court ruling undermines an inherited IRA’s protection from creditors during bankruptcy proceedings.
The Supreme Court case involved a woman who inherited a traditional IRA from her mother. The account initially had $450,000, from which the woman and her husband received monthly distributions. Nine years after she inherited the IRA, the woman and her husband filed for Chapter 7 bankruptcy, at which point there was still $300,000 left in the IRA. They argued that the money in the account should be exempted from the claims of creditors. The bankruptcy trustee and creditors disagreed, arguing that an inherited IRA doesn’t really qualify as a retirement account under bankruptcy law.
Ultimately, the US Supreme Court ruled in favor of the bankruptcy trustee and creditors.
Texas state exemptions can still help
When it comes to bankruptcy proceedings, some states have explicit exemptions for inherited IRAs. Texas is one of them. For beneficiaries who live in Texas, an inherited IRA could be protected during bankruptcy if they choose state exemptions (as opposed to federal exemptions).
However, for states that don’t have explicit exemptions for inherited IRAs written into state law, this money might be up for grabs from creditors.
Consider possible future scenarios with your estate planning attorney
An important part of estate planning is considering what might happen to your money and other assets when you bequeath them to beneficiaries. Sometimes, the efforts you make to improve the financial security of a beneficiary might not work out as you intend. To increase the chances that you’ll make sound decisions about what to do with your assets and who to give your assets to, don’t hesitate to contact an estate planning attorney.