High court rules inherited IRAs aren't protected from creditors

Though some people may be afraid that they will lose everything if they file for personal bankruptcy, this is usually not true. There are some assets that creditors do not have access to in the course of the bankruptcy process. While exemptions vary from state to state, retirement accounts are generally protected. The U.S. Supreme Court recently clarified the treatment of retirement accounts that were received as an inheritance.

Though the case at the heart of the matter is from a state that is a neighbor to Minnesota, the court's decision is likely of interest to bankruptcy lawyers throughout the nation as it could impact their clients.

A couple in the state of Wisconsin inherited an individual retirement account worth a total of $300,000. Before the IRA was distributed, they filed for bankruptcy. The case worked its way through the court system with courts disagreeing as to whether the funds were protected. The Supreme Court heard the case in November 2013.

The court's decision acknowledged that most retirement accounts are protected, but because an inherited IRA must be distributed within five years of receiving it and cannot be held for the beneficiary's own retirement, that protection did not extend to inherited retirement accounts. This was supported by the fact that money from inherited IRAs is not subject to the same regulations as retirement accounts held in the beneficiary's name. In fact, the contents of an inherited IRA can be used at any time for anything the beneficiary desires.

As is the case with most legal matters, the laws are always changing. This is one of many reasons why when dealing with bankruptcy matters it is a good idea to work with a lawyer.

Source: Courthouse News Service, "Inherited IRAs Aren't Creditor-Safe, Court Says," Barbara Leonard, June 12, 2014 

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