In 2005, a set of Federal bankruptcy law amendments added protection of retirement accounts from creditors. However, a few weeks ago, the U.S. Supreme Court unanimously ruled that inherited individual retirement accounts are not protected.
What this means is that your own IRAs and other retirement accounts are protected from creditors while you are alive. If a spouse is your beneficiary, they can move these assets into their own IRA and close the inherited accounts. These assets are then protected from creditors.
A non-spousal beneficiary cannot move the assets to their own IRA account. Therefore, the IRAs and other retirement accounts that they inherit are not protected from creditors. Further, this lack of protection from creditors is not limited to bankruptcy proceedings. Any creditors potentially have access to inherited IRAs and other retirement assets since they have no legal protections. For example, these assets are at risk in the case of a major accident, negligence or other legal claim on assets.
We might immediately think that this is bad and that we need to take some action to protect our children and other non-spousal beneficiaries. While this is possible, such actions complicate things and cost money. So, it might be best to first ask ourselves, how much does this really matter? For example, how likely is it that significant IRA assets will remain after both you and your spouse have died. Also, how likely is it that your children or other non-spousal beneficiaries will find themselves in bankruptcy?
If you think your estate needs protection in this area or have other estate planning questions, Guidepost Financial Planning can help you analyze your situation. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.