While the dispute over inherited IRAs has not arisen often, it may crop up more in the future.
Does an "inherited" retirement account remain a retirement account for the intended heir? This may sound like a rhetorical question, but it is currently one before the U.S. Supreme Court in the matter of Clark et ux. V. Rameker et al.The decision could have important consequences for those who are looking to leave an IRA to their heirs – and NOT to the heir's creditors.
This issue was explored by Reuters in a recent article titled “U.S. high court to chart fate of inherited IRAs in bankruptcy.”
You see, the Clarks inherited a $300,000 IRA and then went into bankruptcy to the tune of some $700,000. Consequently, when the bankruptcy trustee became mighty interested in the IRA, the Clarks cried foul. As a general rule, IRAs are exempt from many bankruptcy proceedings of the account owner. Some courts have upheld this protection even when the account is inherited by one who is not yet a retiree and is not the account owner, but still complies with the strict distribution requirements for inherited IRAs.
Other courts have been less favorable and now it is up to the highest court.
It may seem strange to think about bankruptcy when planning for the eventual distribution of your IRA to heirs. After all, leaving your heirs behind is one thing, but ensuring that they are protected is a still greater step.
How will the Supreme Court determination affect you?
Reference: Reuters (November 26, 2013) “U.S. high court to chart fate of inherited IRAs in bankruptcy”