In June of 2014, the U.S. Supreme Court heard a case and unanimously ruled that an Individual Retirement Account (IRA) left to a non-spouse beneficiary was not to be a protected asset from a bankruptcy proceeding. This ruling changed how inherited IRAs are to be treated in bankruptcy; previously, an IRA was an exempt asset, but this case now alters the rule on the protection or non-protection of inherited IRAs.
The facts of the case were that a husband and wife filed for bankruptcy in 2010, claiming that an IRA the wife inherited from her mother (worth approximately $300,000.00) was a qualified retirement fund and therefore should not be applied towards the claims of creditors. Several years later, the case made its way up to the U.S. Supreme Court, which determined that the client was not going to have protection from bankruptcy proceedings for those assets.
Essentially, the prior concept protecting IRAs from bankruptcy proceedings was a consideration by the court that a self-funded IRA was a protected account because the contributor was working and the funds were sheltered from taxes. In the case discussed above, however, the court treated an inherited IRA differently; since it was not saved by the taxpayer/bankruptcy filer, it did not receive the same protection from bankruptcy proceedings. Basically, a person can no longer deposit money and contribute to a rollover/inherited account, and is also required to take distributions, whereas a self-contributed IRA is not required to make distributions until the required minimum distribution date occurs.
It is important, therefore, to pay attention to all court rulings, and presume that only a self-contributed IRA would be protected from proceedings in the unfortunate event of a bankruptcy. If a person is considering bankruptcy, and has received funds, it is crucial to plan for the protection of those assets. A wealth creation and wealth protection plan should be implemented in all cases, as this important new decision affects non-contributed, or inherited IRAs.
Hyman G. Darling, Esq.