Maroney Law Blog

Tuesday, August 12, 2014

Inherited Individual Retirement Accounts Are Not Exempt from Creditors

For many individuals, the assurance that their loved ones will be provided for without interference from outside entities is a key concern when developing a life planning strategy. Indeed some provisions in the law allow for certain assets to be protected from creditors depending on their classification.

Currently, the Internal Revenue Code (522) permits a debtor to exempt from property of the estate the following: "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986."

Recently, however, the United States Supreme Court held that inheritied Individual Retirement Accounts (IRAs) are not exempt from creditors when the person who inherits the account is anyone other than the spouse of the original IRA holder.

The case Clark v. Rameker Trustee presented the issue as to whether the debtor could protect her mother's IRA that she had inherited upon her mother's death.

Ultimately, the Court held that funds in an IRA inherited from anyone other than the bankrupt debtor's spouse are not "retirement funds" within the meaning of the United States Bankruptcy Code.

Therefore if you are a friend, sister, brother, or mother of the deceased, and you inherit their IRA upon their death, the inherited account is not exempt from creditors, should you be involved in bankruptcy proceedings. Basically, anyone other than the spouse of the deceased beneficiary is subject to this rule. But why?

  1. The Court reasoned, the Internal Revenue Code treats IRAs inherited from a non-spouse differently from IRAs inherited from a spouse, as only spouse can essentially combine their IRA (Roll over) with their deceased spouses account as well add funds to it
  2. The policy behind the code’s retirement fund exemption was enacted to "protect the debtor's essential needs." Because there is nothing stopping a non-spouse individual who inherits an IRA from using the funds for purposes not considered “essential,” the law would be effectively undermined.

While this ruling makes it clear that certain classifications of retirement plans will enjoy different protections, there are a variety of other strategies one can implement to make sure that their loved ones are financially protected after they are gone. To learn more and to protect your beneficiaries, contact a skilled trust and estates attorney

Based in Melville and Garden City, New York, the attorneys at the Law Offices of Maroney Associates, PLLC assist clients throughout Nassau County, Suffolk County, Queens, and the cities of Mineola, Hempstead, New Hyde Park, Franklin Square, Williston Park, Queens Village, Melville, Huntington, Farmingdale, Patchogue and Uniondale, NY.

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