Bankruptcy And The Inherited IRA

The U.S. Supreme Court will hear a dispute in the bankruptcy of a small-town pizza shop owner, taking on a case that could dictate how inherited individual retirement accounts are treated in bankruptcy.

Is a retirement account that is “inherited” still a retirement account? This may sound like a rhetorical question, but it is currently one before the U.S. Supreme Court in the matter of Clark et ux. V. Rameker et al.The decision could have important ramifications for those who are looking to leave an IRA to their heirs – and NOT to the heirs and their creditors.

This issue was explored by Reuters in a recent article titled “U.S. high court to chart fate of inherited IRAs in bankruptcy.”

You see, the Clarks inherited a $300,000 IRA and then went into bankruptcy to the tune of some $700,000. Consequently, when the bankruptcy trustee tried to include the IRA as an asset in the Bankruptcy estate, the Clarks cried foul. As a general rule, IRAs are exempt from many bankruptcy proceedings of the account of the retiree/owner. Some courts have upheld this protection even when the account is inherited by one who is not yet a retiree and is not the account owner, but still complies with the strict distribution requirements for inherited IRAs.

Other courts have been less favorable and now it is up to the highest court.

It may seem strange to think about bankruptcy when planning for the eventual distribution of your IRA to heirs. After all, leaving your heirs behind is one thing, but ensuring that they are protected is a still greater step.  The advice of counsel experienced in estate planning with IRA estate assets is paramount.

How will the Supreme Court determination affect you?  Briefs are scheduled for January 2014.  We will all hope for the decision of the Supreme Court in 2014.

Reference: Reuters (November 26, 2013) “U.S. high court to chart fate of inherited IRAs in bankruptcy”