A Follow Up to Asset Protection of IRAs and Retirement Accounts


In August, I related that the US Supreme Court unanimously ruled in the case of Clark, et ux v. Rameker, Trustee, et al, that funds held in inherited IRAs are NOT “retirement funds” within the meaning of §522(b)(3)(C) and therefore are not protected in bankruptcy.  I thought that an additional comment was important to bring home the devastating effect this decision can have on a child, or other heir, that has or could have a judgment against him/her in the future.

Lets assume that a child has an inherited IRA.  In other words, the parent has passed away and the IRA is payable to the child.  Generally the child would have to withdraw the funds over a five-year period but often there are special provisions are added to trust documents to allow a “stretching” of the IRA over the life expectancy of the child.  The prior law protected the IRA funds from judgment creditors.

However, now the child’s interest in the IRA is attachable by the judgment creditor.  That means that the judgment creditor can take the assets of the IRA in satisfaction of the judgment.  However, withdrawal of IRA funds carries with it a tax consequence.  This is income to the child.  So not only is the IRA lost to the creditor, but the child has to pay income tax on the money that was attached!  And the money wasn’t even his to begin with…it was the parent’s IRA!

A standalone IRA trust has become a very popular estate planning tool to prevent this disastrous result.  Please contact me for further information if you have an interest in protecting your IRA from your children’s creditors.

This entry was posted on Friday, October 3rd, 2014 at 7:56 pm and is filed under Estate Planning, General Legal, Medi-Cal.