Most people think of their IRA as a “nest egg” that is protected until it is withdrawn in retirement and which can be similarly protected if left to an individual beneficiary such as a family member at death. In general, that assumption is true while the person who created the IRA is alive; but the protection for IRAs following the death of that person has been less certain. A recent decision of the U.S. Supreme Court further erodes the protection that may be available to individual beneficiaries of IRAs and increases the premium on proper advance planning for those funds.
In the case of Clark v. Rameker, decided June 12, 2014, the U.S. Supreme Court, in an unanimous opinion, held that funds in an IRA account inherited by a daughter from her mother were fully subject to the claims of the daughter’s creditors in bankruptcy. The Court reasoned that the exemption normally provided IRAs under the bankruptcy law only protected those accounts while they were held as “retirement funds” and not after they were inherited by the daughter. At that point, the Court stated that the funds were no longer maintained primarily for retirement purposes but could be, and in fact were, required to be distributed on a current basis and without the restrictions otherwise applicable to the original creator of the account. For example, the Court noted that the daughter, as beneficiary of the IRA, had the right to withdraw those funds at any time and for any purpose without the penalties or limitations otherwise imposed on the IRA during her mother’s lifetime.
Fortunately, there are alternatives available for individuals who may be concerned that the assets they leave to their loved ones, such as their IRAs, may be lost to claims of creditors. Using a well-drawn trust as the receptacle for these assets may provide the desired protection for the beneficiaries from known and unknown creditors. Given the prevalence of litigation and the uncertain economic situation for many beneficiaries, the safety afforded by such a vehicle should be carefully considered.
Please contact us if you have questions about this Supreme Court decision, and how it may affect you, your IRA, and your beneficiaries.