It’s your inherited IRA, not creditors’Blog added by Allen Greenberg on June 19, 2014
Allen Greenberg

Allen Greenberg

Denver, CO

Joined: May 29, 2013

Who could blame Heidi Heffron-Clark were she to flee to a South Pacific beach with whatever is left of her mother’s IRA?

The Supreme Court a few days ago gave Heffron-Clark plenty of reason to open one of those secret offshore accounts after ruling that her inherited IRA (and yours as well) are fair game for creditors.

It’s not on the level of, say, Brown vs. Board of Education, but this is clearly one of those Supreme Court opinions with implications for any grandparent or parent hoping to leave their children a little something more than nice memories.

Estate planners were no doubt flooded with phone calls in the days following the court’s decision.

Rather than suggesting they pack their sunblock and slip away in the middle in the night, many of those planners have been talking to clients about establishing a trust fund for their inherited IRA savings. But that’s a very complicated bit of business, so be ready to spend big on plenty of lawyerly advice.

Under bankruptcy law, all kinds of retirement accounts are protected from creditors. If you’re a surviving spouse, for example, the court’s decision won’t affect you. A 401(k) account also is protected under ERISA. And rollover IRAs from 401(k) and similar plans also are shielded.

Yet with pretty much everyone in the country facing some level of shortfall in their retirement accounts, the Supreme Court’s decision seems to ignore what should have been an overriding consideration: Inherited IRAs are passed along from one generation to the next with the very idea of helping heirs achieve a measure of financial security in their lives.

The court made a bad distinction between your own 401(k) or IRA and one you might have been lucky enough to inherit from a parent.

Current law, of course, doesn’t allow an IRA account holder to withdraw funds before age 59 without paying a steep penalty. Unfortunately, an inherited IRA is treated in exactly the opposite way, with withdrawals mandated annually.

According to various published reports, Heffron-Clark followed the law, drawing money out of her mother’s IRA over the years. Whether she did so to buy designer shoes or simply put food on the table isn’t germane.

Some in Congress are hoping to push through legislation this year or next to address some of the problems with the U.S. retirement system. Addressing the inequity in how inherited IRAs are treated should be added to their list.

Originally published on
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