When a debtor files bankruptcy, the assets of the debtor are placed in a bankruptcy pot (estate), which is utilized to pay creditors depending on order of priority. The bankruptcy rules allow debtors to withdraw or “exempt” certain assets from the bankruptcy estate to save for their own use. Included in the code at 11 USC § 522(b)(3)(C) are exemptions for retirement funds, including traditional IRAs and Roth IRAs, that meet certain standards. In Clark v. Rameker, the United States Supreme Court determined that the exemption does not apply to an inherited IRA. 13-299, 2014 WL 2608860, 2014 U.S. LEXIS 4166 (U.S. June 12, 2014).
This ruling is substantial, because many people inherit IRAs from their loved ones. If the original owner of the IRA leaves money to a beneficiary that may be facing creditors or future bankruptcy, those assets may actually be used to pay off those creditors. In short, the intent of the donor to gift assets, may fail completely. The Supreme Court’s ruling opens the door to other possible creditors, not just creditors in bankruptcy. The bottom line is that more thought and planning must be done prior to naming a person as beneficiary or heir of an IRA. You can utilized trusts and other estate planning measures to alleviate the concern that future creditors will attack the gifted IRA. Consult with us so that any decedent IRA does not go to pay off creditors that are not creditors of the decedent.