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Can you prevent an inherited IRA from being lost in bankruptcy?

| May 5, 2017 | Estate Administration & Probate |

People in the midst of creating an estate plan understand that the ultimate goal is to provide for others (especially vulnerable adults and children) when they are no longer able to do so. But part of the difficulty of estate planning is that the future cannot be predicted.

Nevertheless, savvy people can merge their generosity with their beliefs to create best-case and worst-case scenarios so that options remain available to deal with unanticipated circumstances.

Despite all the planning, one of the most vexing questions a testator must consider is the future financial condition of a beneficiary. This is especially important given the U.S. Supreme Court’s 2014 decision on the classification of inherited IRAs. Basically, the court ruled that such an asset could not be considered exempt under federal bankruptcy laws. So if a person who sought bankruptcy protection soon after inherited a loved one’s IRA, it would be considered part of the bankruptcy estate, and could be subject to liquidation to pay the person’s outstanding debts.

The ruling was a stark contrast compared to previous federal court rulings, which basically held that an inherited IRA was the same as any other IRA in that it could not be considered an asset of the bankruptcy estate. Basically, these accounts are protected under the bankruptcy code because they are designed not to be used until retirement, absent very limited circumstances.

In light of this change, there are several ways to prevent inherited IRAs from being lost in bankruptcy. An experienced estate planning attorney can give you some options.