Options for protecting inherited IRAs from bankruptcy
In a prior post, we highlighted the U.S. Supreme Court’s decision last summer that inherited IRAs could not be considered exempt assets; therefore making them fair game to creditors in the event a beneficiary sought bankruptcy protection. While the decision marked a clear departure in policy in the realm of bankruptcy (and estate planning), it also may have created an opportunity for savvy and creative estate planning.
This post will explain why.
Before highlighting our ideas, it is important to note that the Court reasoned that a person who seeks bankruptcy protection and then inherits an IRA may bypass the financial protections meant to discourage early withdrawal of such funds and simply pay the taxes and fees associated with the withdrawal and simply purchase new assets; all the while leaving creditors without any legal recourse.
To that end, creating your estate plan by including distribution restrictions may be a good idea to protect against this scenario. For example, planning for an inherited IRA to be immediately transferred into a trust where an independent trustee has control over distribution could resolve the issue. After all, the rules regarding early distribution of the IRA will not be offended, and the added layer of decision-making through an independent trustee may be effective in protecting such an asset in the event of a bankruptcy.
Keep in mind that the foregoing is not legal advice. Questions about your individual situation and the options available for distributions should be directed to an experienced estate planning attorney.