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Inherited IRAs: Within Creditors’ Reach

June 13, 2014

The confusion surrounding the status of unspent IRAs that parents leave to their children has finally been cleared up, following a unanimous Supreme Court decision.  The Court ruled this week that inherited Individual Retirement Accounts (IRAs) are not shielded from creditors throughout bankruptcy proceedings.  Typically, bankruptcy law protects retirement assets from being eaten up by creditors after filing, but inherited IRAs differ because the money can be accessed before the new owner actually retires.

The initial case involved a couple in Wisconsin who filed for bankruptcy but wanted to preserve the $300,000 IRA inherited after the death of the wife’s mother.  Supreme Court Justice Sonia Sotomayor said that the status of an inherited IRA makes it less like retirement savings and more like a pool of money available to pay off creditors.  Without this distinction, there would be no way to prevent someone from using the entire balance of the inherited account “on a vacation home or a sports car immediately after her bankruptcy proceedings are complete.”  Therefore, following this decision, money in an inherited IRA may be used to pay off creditors during bankruptcy proceedings.

If you have questions related to IRAs or other estate planning issues, please contact the office of HoganWillig at 716-636-7600.