Can Creditors Reach “Inherited IRA” Accounts?

The short answer is:  Yes!  In the case of Clark v. Rameker, decided on June 12, 1014, the question before the U.S. Supreme Court was whether an individual retirement account (“IRA”) that an adult child had inherited from a parent could be invaded by the child’s creditors?  Although the case was a Bankruptcy law case it does have ramifications for estate and asset protection planning, retirement planning and spousal and nonspousal inherited IRAs alike.

In holding that the child’s creditors can access the IRA, the Supreme Court ruled for various reasons that funds held in an inherited IRA account are not true “retirement funds” within the meaning of the Bankruptcy Code.

Cases such as Clark v. Rameker, highlight the increasing complexity in this area of law.  Since retirement assets are often one of an individual’s largest assets, New Hampshire families need comprehensive estate planning.  Attention should be paid to coordinating retirement benefits/beneficiaries (and beneficiary forms) with their estate planning documents and asset protection concerns.

One important side note is that unlike a child who inherits an IRA, a husband or wife who inherits their husband or wife’s IRA has an option not available to other nonspouse inheritors:   The surviving spouse can roll the assets into his or her own IRA and postpone distributions from a traditional IRA until they turn 70½.

Many people are unaware that their retirement accounts may not be protected from creditors or that if they do not properly designate a named individual or if they merely name their “estate” as a beneficiary, the opportunity for proper IRA planning could be wasted. Furthermore, if the beneficiary designation form names a trust, that trust needs to be drafted to enable designated beneficiaries to fully maximize the tax-deferral options to spousal and nonspousal beneficiaries alike.

If you or your loved ones have questions or concerns about how to coordinate retirement assets with your estate planning documents including your revocable living trust or an irrevocable New Hampshire asset protection trust you should consult with a qualified estate planning attorney and your financial advisors.