Heidi Heffron-Clark became the beneficiary of an inherited IRA when her mother passed away in 2001. Almost ten years later, Ms. Heffron-Clark filed for Chapter 7 bankruptcy. She argued that the inherited IRA funds should be exempt from her creditors because they were “retirement funds.” (Retirement savings like 401(k) plan assets and IRAs are normally exempt from the claims of creditors in a bankruptcy.) The creditors in Ms. Heffron-Clark’s bankruptcy case contested the claimed exemption.
The case made it all the way to the Supreme Court, where a unanimous decision supported the creditors, stating that inherited IRAs differ from traditional IRAs and do not qualify as “retirement funds” under the Bankruptcy Code. The Court found that three factors differentiate an inherited IRA from a participant-owned IRA: inherited IRA owners may not make additional contributions to the IRA, they are required to make minimum withdrawals regardless of their age, and they are not subject to age-related tax penalties for withdrawals. Also, the Court pointed out that inherited IRA funds can be used for current consumption and are not restricted to use after attaining retirement age.
Following this decision, it may be worth contacting your estate planning attorney to discuss whether you should consider methods to avoid this potential issue and protect your IRA beneficiaries.
To read the full opinion, click HERE.
“Supreme Court Decisions on Inherited IRAs MayChange Calculus on Structuring Beneficiary Designations” by Deborah M. Beers, Esq.; Bloomberg BNA; August 13, 2014: http://www.bna.com/supreme-court-decisions-n17179893782/
“Supreme Court holds inherited IRAs are not retirement funds” by Sally P. Schrieber, J.D.; Journal of Accountancy; June 12, 2014; http://www.journalofaccountancy.com/News/201410319.htm