The United States Supreme Court handed down a ruling this week (Clark v. Rameker Trustee) that has major implications for Inherited IRA’s (also called Stretch IRA’s or Beneficiary IRA’s). In essence, the unanimous decision is that Inherited IRA’s are NOT protected from bankruptcy proceedings or creditor claims, unlike regular IRA’s. The court reasoned that the funds are not considered “retirement funds” and therefore are not afforded the same protections. Important note: A spouse that inherits an IRA is afforded bankruptcy protection.
This case really illustrates a key planning technique, which is the use of a Retirement Asset Protection Trust to protect Inherited IRA’s. With the use of a Retirement Asset Protection Trust for your IRA, you can ensure your children or loved ones inherit your IRA and receive the following benefits:
- Ensuring that the IRA becomes a stretch IRA, rather than distributed as a lump sum (with ALL of the income taxes immediately due)
- Provide a level of asset protection from creditors, bankruptcy, divorce, lawsuits, etc.
- Keep the IRA in the bloodlines, perhaps creating a multi-generational IRA for your children, grandchildren and beyond.
In summary, the US Supreme Court ruled that Inherited IRA’s received outright by beneficiaries are NOT protected from bankruptcy proceedings. However, by using a well-drafted and sophisticated trust, you can protect your heirs from themselves and others.
You can read the entire Supreme Court opinion here.