The U.S. Supreme Court ruled this month that inherited IRA’s are not exempt from creditors in bankruptcy.
Mr. and Mrs. Clark were the owners of a small pizza shop in Soughton, Wisconsin. In 2010 they filed for bankruptcy and closed the store. Their only remaining asset was an IRA inherited from Mrs. Clark’s mother with a value of about $300,000. Although regular IRA’s are generally protected from creditors, the Court unanimously determined that inherited IRA’s don’t serve a similar retirement purpose and should not be accorded protected treatment in bankruptcy.
The treatment of inherited IRA’s is now a significant estate planning issue for many individuals. Those who hold IRA’s that may be left to children, should arrange for the IRA to be held in a manner which protects the asset from future or even outstanding claims against the children. Creating and designating a properly designed spendthrift trust as the IRA beneficiary can often accomplish a significant level of protection for family members.