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Inherited IRAs may no longer be safe from creditors' claims

Florida residents may be interested in an upcoming Supreme Court decision expected in June. IRA accounts may be treated differently when it comes to inheritance. In some jurisdictions, such as the 8th Circuit, inherited IRAs are exempt from creditors' claims in bankruptcy. In other jurisdictions, most notably the 7th Circuit, they might be open to claims by the heir's creditors. Because of this difference, the Supreme Court is considering how they should be treated when inherited.

IRA funds are exempt from bankruptcy claims for the original holder, within prescribed limits, as a retirement fund. When passed to non-spousal beneficiaries, their classification as a retirement fund has been argued.

Central to this argument is that the original holder of the IRA is penalized if the funds are withdrawn before retirement age. The non-spousal beneficiary is held to a different standard. They pay no penalty if the IRA funds are withdrawn before retirement and, in fact, are required to withdraw the funds within a time frame not related to age. This, according to some, opens the inherited IRA to the heir's creditors since it is not truly a retirement fund for them.

If the Supreme Court rules that inherited IRAs are subject to creditor claims, then it is may be prudent to plan differently. One suggestion is to place the IRA into a see-through trust. This method would limit the beneficiary's option to withdraw IRA funds and may be structured to provide the maximum tax benefits. It is important that the trust be irrevocable and restricts the use of funds. An attorney can offer further advice and counsel regarding the use of IRAs as part of a comprehensive estate plan.

Source: Think Advisor, "Supreme Court Ponders Changing the Rules on Nonspousal Inherited IRAs", April 14, 2014

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