The Supreme Court unanimously held in Clark v. Rameker, 573 U.S. ___ (2014), that retirement funds inherited by a beneficiary from the original plan participant are not considered ‘retirement funds’ within the meaning of the federal bankruptcy exemptions found at 11 U.S.C. 522(b)(3)(c). As a result, the bankruptcy trustee may consider the inherited IRA to be an available asset of the bankrupt estate to satisfy creditor claims. The financial and estate planning communities are scrambling to provide critical warnings to their clients, “safeguard your IRAs!.” My colleague and estate planning lawyer, Anna Serrambana, Esq. suggests IRA owners may want to reconsider their beneficiary designations. Despite the added cost and complexity, leaving your IRA to a trust can be a safe move.
Three reasons were given for denying that beneficiaries hold protected retirement funds.
First, an IRA beneficiary who inherits can’t make additional contributions to that account. Qualified individuals can put money into retirement accounts such as traditional IRAs and Roth IRAs. Tax breaks encourage such outlays. But inherited IRAs are only for withdrawals.
Second, beneficiaries must take minimum distributions and pay any resulting tax, regardless of age. “Even a 5-year-old IRA beneficiary, who certainly isn’t retired, must withdraw something,” Slott said.
Third, the 10% early withdrawal penalty doesn’t apply to inherited IRAs. Unless certain exceptions are met, withdrawals from traditional and Roth IRAs before age 59-1/2 will lead to fines.
“Nothing about the inherited IRA’s legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete,” the Supreme Court noted in its opinion.Read more: http://www.nasdaq.com/article/in-bankruptcy-inherited-iras-are-up-for-grabs-cm363771#ixzz381bWoLHX
From a bankruptcy standpoint, I advocate to protect my client’s assets while eliminating debt, to the fullest extent to the Bankruptcy Code. Timing and planning are our most powerful tools when it comes to eliminating debt for clients. With these changes, my advice includes filing bankruptcy long before there is even a remote chance to inherit any significant amount of money, greater than the current ‘wildcard’ exemption here in California, which is $22,500.00. In addition to timing and planning, it remains more critical to consult with an experienced bankruptcy lawyer who understands the subtle nuances of the Bankruptcy Code. An inheritance can also be disclaimed, but this too, requires accurate timing.