With a decision that may have every owner of an Inherited IRA scrambling to protect assets, the United States Supreme Court decision on Clark v. Rameker is sending shock waves through the Trust and Estates bar, and the offices of financial planners everywhere.
The decision, handed down on June 12, 2014, removes the protection, known as the “retirement exemption” that has long kept inherited IRA accounts from being considered as assets during bankruptcy proceedings. The case travelled from Bankruptcy Court, which disallowed the exemption, to District Court, which reversed, saying that the exemption covers any account in which funds originally accumulated for retirement, to the Seventh Circuit, which disagreed and reversed the District Court. On June 12, 2014, the Supreme Court decided that funds held in inherited or beneficiary IRAs do not have the same characteristics as traditional IRA funds.
The concept of protecting IRA funds to allow individuals the ability to retire from their working lives, when accumulating savings, is a legal and public policy decision. If everyone who was subject to litigation lost their IRAs to lawsuits, the retirement status of Americans would be worse than it already is.
According to the Supreme Court decision, inherited IRAs are not the same as regular IRAs and therefore do not deserve the same protection from bankruptcy proceedings. The beneficiary owners cannot invest additional monies into the account, they must take required distributions from the account regardless of how far away their own retirement date is and they have the option to withdraw the entire amount at will with no penalty other than the income tax.
If you have an inherited IRA or beneficiary IRA account, there are steps you can take to protect these assets, but be advised that the laws surrounding these strategies are complex and require the special knowledge of a skilled Trust and Estates attorney.
Questions? Call our office at 516-307-1236.