Are Inherited IRAs Still Protected after Clark v. Rameker?
There are big changes afoot for inherited IRAs. Justices have made a unanimous decision in the landmark United States Supreme Court Case Clark v. Rameker, which was centered around the question of whether IRAs that a beneficiary inherits are considered “retirement funds” anymore.
And it’s a valid question. IRAs are designed as retirement vehicles for the person who originally owned the IRA, but this isn’t the case for a beneficiary. Put simply, the IRA owner isn’t funding the IRA to fund the retirement of the beneficiary.
This distinction might seem trivial, but in the event of debt or bankruptcy, it matters a great deal for creditors. Traditionally, federal bankruptcy law shields retirement funds from creditors.
What Was the Decision?
In a surprising turn of events, all nine justices agreed that inherited IRAs are not “retirement funds” under federal bankruptcy laws. How did they come to this decision? They weighed three key factors:
- IRA owners can contribute to the account, but beneficiaries of an inherited IRA aren’t able to make additional contributions to the account.
- IRA owners can defer distributions from their IRA until age 70½, while beneficiaries of an inherited IRA must begin taking minimum distributions every year (regardless of how close they are to retiring themselves).
- IRA owners must wait until age 59½ to take distributions without penalties, but beneficiaries of an inherited IRA can withdraw the funds at any time and for any purpose, without any penalty.
Based on these factors, they decided that retirement accounts don’t really operate as retirement accounts for the people who have inherited IRAs.
What Happens Next?
The decision in this case has huge implications for estate planning and inheritance. If you have some debt and a sizable sum in your IRA, creditors can’t go after your IRA funds—but once that IRA is passed along to a beneficiary, it’s fair game.
In a nutshell, the justices held that because an inherited IRA is freely consumable, it’s a valid source of funds for creditors.
The most important outcome of this case is that a trust is more important than ever! You should seriously consider a Retirement Preservation Trust as the beneficiary of an IRA, because it will enjoy asset protection that a human beneficiary can no longer enjoy. Ignoring this important Supreme Court decision could cost your family all the funds in an inherited IRA during a bankruptcy.
Do you have questions? Are you unsure how to proceed? Talk to us at Morton Law about how these changes will affect you and your family’s situation!
Give us a call today!
~ Ronald Morton
