When Heidi Heffron-Clark inherited an IRA from her mother in 2001, she was unaware that, upon filing for bankruptcy nine years later, the account could not be shielded from creditors.
In an opinion that was unanimously agreed upon, Justice Sonya Sotomayor, announced the court’s ruling that inherited IRAs can not be protected in cases of bankruptcy.
The determining factor was based on legal distinctions between an IRA that one set’s up and funds for themselves vs. one that is inherited. According to the ruling, inherited IRA funds (both traditional and Roth) are not considered retirement asset; inheritors cannot contribute additional funds to the account, and they can withdraw money from it at any time without penalty. Generally speaking, non-spousal IRA heirs must either withdraw the entire account balance within five years of the original owner’s death, or take out a minimum amount each year, starting by Dec. 31 of the year after the IRA owner died.
This is a stark contrast to the rules that apply to IRA owners, which are intended to ensure that the contributor will have money available during their retirement, and therefore justify protection of those assets during bankruptcy.
One estate planning solution would be to leave the IRA assets in a trust rather than outright.
The complete opinion for Clark v. Raemaker can be found here.