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Inheriting an IRA now comes with New Bankruptcy Rules

Inheriting an IRA now comes with New Bankruptcy Rules

  • November 21st, 2014
  • jrhassociates
  • Comments Off on Inheriting an IRA now comes with New Bankruptcy Rules

Are funds received from inheriting an IRA protected during bankruptcy?

In a decision made by the Supreme Court, funds from inheriting an IRA are not protected in bankruptcy. This decision came from the case Clark v Rameker.

Brief History of the Inherited IRA Case

In June of 2014 the court made its final decision regarding Heidi Heffron-Clark and her inherited IRA. Heffron-Clark inherited the IRA from her mother in 2001 and filed for bankruptcy in nine years later. The IRA inheritance was left through a beneficiary designation form filled out by her mother, Ruth Heffron, at the opening of the account in 2000 (IRA inheritance is normally not covered in a will). When Ruth died the following year, leaving her daughter Heidi as the sole beneficiary, the account’s worth was over $450,000.

Heffron-Clark filed a Chapter 7 bankruptcy petition in October 2010 after already drawing down the account to $300,000. She then argued that the money in that account should not be available to her creditors because it was for retirement funds. Creditors opposed and the bankruptcy court agreed with the creditors. After that the decision was reversed by appeal in a U.S. District Court, and finally overturned in the 7th Circuit U.S. Court of Appeals.

Features that Make Inheriting an IRA Unique

Adding Funds:
Unlike the owner/opener of the IRA, the inheritor cannot put additional funds into the account.

Withdraw:
Unlike the opener, the inheritor can withdraw at any time without penalty.

Ramifications for Spouses:
When a spouse is the inheritor, there are options not otherwise available to inheritors. They can rollover assets into their own IRA and delay distribution from a traditional IRA until they are 70½. However, like other IRA owners if they withdraw early, after rollover, they will pay a 10% early-withdrawal penalty before the age of 59½.

Until the rollover, the account is an inherited IRA. The spouse will not have to take any money out until the deceased spouse would have turned 70½. But after the Clark v Rameker decision those assets would not be protected from bankruptcy, giving another reason to rollover when inheriting an IRA, besides tax benefits. If you need help better understanding your options when inheriting an IRA,  call the tax professionals at JRH & Associates at (516) 794-5752!

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