Whether an inherited IRA is protected from creditors may depend on the state it is held in. A U.S. bankruptcy court ruled that Idaho state law is broad enough to exempt such accounts from being seized for the purpose of paying debts.

The ruling is notable because in 2014, the U.S. Supreme Court ruled in Clark et ux v. Rameker, Trustee, et al that inherited IRAs are not protected from creditors. In writing for the court, Justice Sonia Sotomayor found that funds held in inherited IRAs are not set aside for retirement. Her rationale was based on three reasons: additional funds can never be contributed, beneficiaries are required to take withdrawals (either the full balance within five years or minimum withdrawals every year), and withdrawals from an inherited IRA can be taken at any time without penalty regardless of the beneficiary’s age. (See “Supreme Court: No Bankruptcy Protection for Inherited IRAs” in the July 2014 AAII Journal Dispatches for more about the ruling.)

In a January 2019 ruling, U.S. Bankruptcy Judge Terry L. Myers did not contradict or disagree with Justice Sotomayor’s opinion. Rather, he noted the way Idaho state law was written and highlighted case law as the reason why the inherited IRA at issue in Frederick Michael Arehart and Paula Jean Aerhart should be exempted from creditor claims.

Idaho Code 11-604A “protects a citizen’s right in any employee benefit plan,” according to Myers’ opinion.

The case cited by Myers was Gregory Allen McClelland and Debra Jean McClelland. In 2008, U.S. Bankruptcy Court Judge Jim D. Pappas opined that “in drafting this exemption, the Idaho legislature painted with a broad brush.” As such, Myers described the Idaho statute as not requiring “a finding that the funds in the account or plan be ‘retirement funds.’” He then further wrote, “in the 10 years since McClelland was issued, the legislature has done nothing to suggest that Idaho’s broad language was unintentional or to alter the language or narrow the exemption found in Idaho Code 11-604A.”

The key factor in this case is Idaho state law. Whether or not an inherited IRA in another state can be protected against creditors in a bankruptcy case may depend on the laws of the specific state. Those concerned about protecting such assets should discuss their concerns with an estate attorney familiar with the state’s laws.

Sources: “In RE: Frederick Michael Arehart and Paula Jean Arehart,” U.S. Bankruptcy Court, District of Idaho, January 10, 2019; and In RE: Gregory Allen McClelland and Debra Jean McClelland, U.S. Bankruptcy Court, District of Idaho, January 7, 2008.

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Dispatches

Supreme Court: No Bankruptcy Protection for Inherited IRAs