Rockville, Maryland, residents may have read about a recent U. S. Supreme Court ruling that would allow creditors access to inherited Individual Retirement Accounts. The inheritance, however, must be from a person other than a spouse. Since the ruling, media across the country have been addressing the issue and its impact on estate planning and bankruptcy filings. The Supreme Court unanimously decided that the plaintiff’s claim that the justices should consider an inherited IRA exempt from a bankruptcy proceeding was invalid. The plaintiff had inherited the IRA from her deceased mother and then identified it as exempt from a Chapter 7 bankruptcy filing she submitted years later. The IRA was valued at $300,000 at that time.
Interestingly, state laws differ in treatment of inherited IRAs at time of bankruptcy. At present, eight states, not including Maryland, have laws in place that protect an inherited IRA from creditors in the event of a bankruptcy filing. An apparent solution to this problem is that a bankruptcy filer, in light of the Supreme Court’s ruling, should leave IRA money in a trust.
Another noteworthy point is whether the bankruptcy code would continue to consider an IRA as a retirement fund after it has been passed along as an inheritance. With this ruling, it is possible that the common practice of treating an inherited IRA as an exempt asset and not considering it during a bankruptcy filing may be seen by the state as a fraudulent conversion of an asset that is not exempt.
Considering the significant number of changes needed to plan an estate or file a personal bankruptcy in light of this ruling, it may be a wise decision to speak with an experienced Rockville Maryland nonprofit bankruptcy attorney to identify the best possible options to safeguard assets and interest and also abide by the law.
Source: Investment News, “Advisers proceed with caution following inherited IRA ruling,” Darla Mercado, June 23, 2014