Close

Inherited Non-Spousal IRAs Bankruptcy Exemption Questioned

Inherited non-spousal individual retirement accounts (inherited IRAs) are not protected under the federal bankruptcy code, according to a recent ruling by the U.S. Court of Appeals for the 7th Circuit. The ruling is in contrast to conclusions reached in other district level and circuit level cases, according to WealthManagement.com.

The recent ruling was made in response to a bankruptcy proceeding involving Heidi Heffron-Clark and her husband, Brandon Clark. Heffron-Clark was the designated beneficiary of her deceased mother’s $300,000 IRA. A bankruptcy judge ruled that the inherited IRA did not represent retirement funds in Heffron-Clark’s hands and therefore was not exempt under the bankruptcy code. A district judge reversed the ruling, but the 7th U.S. Circuit Court of Appeals upheld the ruling.

The appeals court based its opinion on how the asset would function in someone else’s hands. The court opined that a trustee is a legal owner of the assets he administers, but a trust’s assets are beyond the reach of creditors. However, because Heffron-Clark inherited the IRA, the assets “did not represent anyone’s retirement funds.” Rather, according to the court, “They had been Ruth’s, but when she died they became no one’s retirement funds. The account remains a tax-deferral vehicle until the mandatory distribution is completed, but distribution precedes the owner’s retirement. To treat this account as exempt… would be to shelter from creditors a pot of money that can be freely used for current consumption.”

...To continue reading this article you must be registered with AAII.

Gain exclusive access to this article and all of the member benefits and investment education AAII offers.
JOIN TODAY for just $29.
Register for FREE
to read this article and receive access to future AAII.com articles.

Log in
Already registered with AAII? Login to read the rest of this article.
  


Discussion

Charles Cason from Florida posted 9 months ago:

The money was designated for a retirement fund when it was paid. Most investors beileve the US laws provide protection for retirement funds. The judge believes the family money changes from when someone in the family chain dies. He must not understand famiuly ties. I would not want to be his heir.


You need to log in as a registered AAII user before commenting.
Create an account

Log In