Inherited IRA’s
A client died two years ago leaving a $ 250,000.00 IRA to his only son. The son turns around and establishes an “Inherited” IRA. Last year the son was involved in a fatal accident where he was to blame. There is a major lawsuit pending and I am under the impression that the “Inherited” IRA is not a protected asset and will be part of the litigation process.
Here is my question: If the court takes the entire $ 250,000.00, who is liable to pay the tax on said funds?
Permalink Submitted by Alan - IRA critic on Mon, 2015-05-11 19:08
If the inherited IRA is distributed for any reason, the client will get a 1099R and have to report the taxable amount in income. Inherited IRAs of a non spouse are no longer protected under the Federal Bankruptcy Act, however there are a handful of states that have adopted state laws that provide creditor protection for inherited IRAs for residents of said state. Check the state law of client’s state of residence at the time of the accident.
Permalink Submitted by Richard Ernst on Mon, 2015-05-11 19:21
The state is New York. So, would the court get the entire $ 250,000.00 or would it be $ 250,000.00 minus the taxes due?Thanks Alan
Permalink Submitted by Alan - IRA critic on Mon, 2015-05-11 21:07
Not sure. Most likely NYS law would come into play.
Permalink Submitted by Jose Morales on Mon, 2015-05-11 22:44
Here are the Civil Practice Laws and Rules regarding the exemption of retirement funds from enforcement of money judgements: http://public.leginfo.state.ny.us/lawssrch.cgi?NVLWO: It doesn’t specifically mention inherited IRAs though, so if it’s determined that the protection only applies to the original IRA owner then it may not receive the same protection.
Permalink Submitted by Richard Ernst on Tue, 2015-05-12 13:30
Thank you guys!!