What happens if you inherit an IRA
from your parents? Is it protected from creditors?
Ruth Heffron had $300,000 in her IRA, and her daughter Heidi became the beneficiary. It remained sheltered from taxation, but unfortunately, she had to declare bankruptcy. The bankruptcy judge held that the IRA was subject to creditors. The Federal District Court reversed adopting the position in the Eighth Circuit Bankruptcy Appellate Panel In re Nessa
. The Fifth Circuit has since agreed In re Chilton
(Fifth Circuit, 2012). However, the Seventh Circuit, in direct conflict with the Fifth, disagreed and turned the funds over to the creditors.
How does this happen?
First, you can read the opinion In Re Heidi Heffron-Clark
, which was decided on April 23, 2013. We now have a split between the circuits, which the Seventh Circuit acknowledges: "We disagree with the Fifth Circuit's decision in Chilton. Because our conclusion creates a conflict among the circuits, we circulate the opinion before release to all judges in active service." This issue can be resolved by the Supreme Court, but it will take time.
What do you do?
Good question. Maybe roll the funds back into a qualified plan
. Maybe deplete the funds and put them into your house or another asset that is exempt. Perhaps with some planning, the IRA should have been placed into a spendthrift trust or IRA trust, but it is too late after a death to do this type of planning. Finally, you can pray the Supreme Court adopts the Chilton position. In any case, be aware of people who plan to have their children inherit their IRA — because it's not your parent's IRA. In Heidi's case it cost $300,000.
Another IRA rescue strategy to avoid
Use inheritance coaching to increase asset retention