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Tuesday, July 22, 2014

Inherited IRAs are no Longer Protected in Bankruptcy. Can This be Fixed?

By:  Susan M. Graham, Certified Elder Law Attorney, Senior Edge Legal, Boise, Idaho

The U.S. Supreme Court decided on June 12, 2014 in Clarket ux. v. RamekerTrusteeet al., that an inherited Individual Retirement Account (IRA) does not share the same characteristics as a traditional IRA and, in a bankruptcy, is not a protected asset for the person who inherits the IRA.

IRAs are protected assets in bankruptcy, but only for the original owner of the IRA.  If an IRA is inherited by a child, the asset is no longer protected in bankruptcy.

What can be done for an inherited IRA to receive bankruptcy protection?  The owner of the IRA can name an “irrevocable, asset protection trust”, created for the benefit of a child, as beneficiary of the IRA after the owner’s death.  These special trusts are often referred to as dynasty, inheritance, legacy and heritage trusts.  A carefully drafted trust may provide that the child is the trustee, and the child has limited access to the funds for health, support, maintenance and education.  These special trusts are complex.  To take advantage of this technique, set up an appointment with your estate planning professional.  





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