Friday, July 4, 2014
Ed Morrow recently published an article entitled, Supreme Court Holds that Inherited IRAs Are Not Protected in Bankruptcy, Are Spousal Inherited IRAs and Even Rollover IRAs Threatened As Well?, Asset Protection Planning Newsletter #248 (June 16, 2014). Provided below is the executive summary of the article:
On June 12, 2014, Justice Sotomayor, writing for a unanimous Supreme Court, resolved a split among circuits as to the protection afforded under the Bankruptcy Code for inherited IRAs. The Court affirmed the underlying 7th Circuit decision and held that once such accounts are inherited, they lose their character as “retirement funds” in the hands of the inheriting party within the meaning of 11 U.S.C. §522(b)(3)(C).
The ramifications of the Court’s decision are broader than you think – it may threaten creditor protection for surviving spouses as well as other beneficiaries. While inherited spousal IRAs might be protected in bankruptcy under the Supreme Court’s interpretation once they are rolled over, they may not be protected until that time and any spousal rollover may be subject to avoidance under fraudulent transfer law.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.