In the next few weeks, we will be reaching out to our clients and referral partners to inform them of the critical importance of safeguarding IRAs and other retirement accounts they will someday pass on to their beneficiaries.
On June 12, 2014, the United States Supreme Court handed down its opinion in Clark v. Rameker. The Court held unanimously that retirement funds inherited by a beneficiary from the original plan participant are not considered to be “retirement funds” within the meaning of the federal bankruptcy exemptions found at 11 U.S.C. §522(b)(3)(C). As a result, a debtor’s bankruptcy trustee may consider the inherited IRA to be an asset of the bankruptcy estate, available to satisfy creditors’ claims.
The Supreme Court has made it clear that U.S. Bankruptcy law will not protect the inherited IRA from the claims of a beneficiary’s creditors.
Importantly, the Court found that inherited IRAs do not operate the same way as an individual’s own retirement account. A participant’s own IRA is subject to early withdrawal penalties if taken out early, and an inheritor of an IRA must take out distributions from the inherited account either within 5 years of the plan participant’s death or over the individual beneficiary’s remaining life expectancy as calculated under tables issued by the IRS determining annual Minimum Required Distributions.1
Working with us to establish a special Standalone Retirement Trust and properly complete the account’s beneficiary designation forms to fund the trust when the participant dies, then the client’s hard-saved retirement will not be wasted if their beneficiaries later end up with looming creditors.