By Beverly DeVeny, IRA Technical Expert Follow Me on Twitter: @BevIRAEdSlott
The area of creditor protection and inherited IRAs has been a murky one. On one hand, IRAs are intended to provide for the account owner in his or her retirement not for the retirement of their children. On the other hand, the Tax Code allows inherited IRAs to remain tax deferred (when certain conditions are met) until distributions are taken from the account.
Generally creditor protection for IRAs is determined by state statute. For bankruptcy, however, protection is available at the federal level as long as the state allows use of the federal bankruptcy rules.
Over the last couple of years, the federal bankruptcy courts have ruled several times on whether or not an inherited IRA is an exempt asset in bankruptcy. In most cases the courts have held that the inherited IRA is an exempt asset in bankruptcy. In two cases where the bankruptcy court decided otherwise, the lower courts’ decisions have been reversed on appeal, with the most recent decision handed down on January 5, 2012.
If you have an inherited IRA and are in the unfortunate position of needing to declare bankruptcy, be sure to discuss including the inherited IRA as an exempt asset. Don’t assume that your attorney will automatically do this.
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