Federal law protects most retirement savings accounts from civil action and creditor claims. However, federal law has its limitations that could make it more difficult to preserve a contested legacy.
The Supreme Court’s Decision on Inherited Individual Retirement Accounts
The United States Bankruptcy Code defines certain assets as “exempted” from creditor claims. Under most circumstances, creditors cannot seize or garnish assets, including:
- Household goods `
- Professional tools
- Insurance benefits
- Public benefits
- Retirement accounts
However, the Supreme Court was recently asked to adjudicate a dispute as to what, exactly, constitutes a “retirement account.”
While hearing arguments in Clark v. Rameker, the justices faced a pressing question: should an inherited individual retirement account be afforded bankruptcy protections the same as an IRA established by the debtor and for the debtor’s own use?
After careful deliberation, the justices reached a unanimous conclusion, finding that inherited IRAs can no longer be categorized as bankruptcy-exempt retirement assets.
How State and Federal Law Offers a Solution to the Supreme Court’s Ruling
Every state, including California, has its own laws on both bankruptcy and inheritance.
While every state treats inherited individual retirement accounts somewhat differently, a trust can typically be used to shield most assets—including IRAs—from creditor claims. This is because the trust, as a legal entity capable of receiving and managing assets, is simply charged with holding the retirement assets for use by a beneficiary.
Since the trust holds the individual retirement account rather than the potentially indebted beneficiary, creditors cannot usually seize trust-owned assets in individual bankruptcy proceedings.
However, not every type of trust can receive retirement assets. Those that can are subject to additional restrictions regulating the use, management, and disbursement of benefits.
Contact a California Estate Planning Attorney Today
An inherited individual retirement account can provide beneficiaries with an additional and exceptional security net. However, this security net may fail if an heir finds themselves in dire financial straits.
You do not have to leave your legacy to chance. The Law Firm of Kavesh, Minor & Otis, Inc. has spent years protecting California families and their loved ones from uncertainty. Please send us a message online, or call us at 1-800-756-5596 to speak with an estate planning attorney, and schedule your free initial consultation.