Unanimous decision will have far-reaching implications in estate planning
In a landmark unanimous decision, the U.S. Supreme Court has ruled that inherited individual retirement accounts (IRA) are not protected from creditors during bankruptcy, according to Forbes. The decision clarifies an important ambiguity in the law and could have very wide implications for people involved in estate planning.
Is an IRA a retirement account?
A key question that the court had to decide is whether an IRA that was inherited from a deceased relative or spouse could still be considered a retirement account. Retirement accounts are protected from creditors by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
In this case, a woman who had inherited her deceased mother’s IRA and afterwards declared bankruptcy argued that the inherited IRA should be off limits to creditors since it was a retirement account. The Supreme Court, however, disagreed, saying that because inheritors cannot contribute to an inherited IRA and can withdraw the money at any point with being penalized, those inherited IRAs should not be considered retirement accounts. Therefore, creditors can go after an inherited IRA in order to settle outstanding debts.
Estate planning implications
The decision will have very broad implications for many people that assumed an inherited IRA would be protected from creditors during bankruptcy. While the decision is serious, people still have options in order to keep the funds of an inherited IRA from being seized by creditors. Spouses, for example, can roll a deceased spouse’s IRA into their own IRA, although that means they will not be able to withdraw the money early without facing a penalty.
Alternatively, people can name a trust as a beneficiary of an IRA instead of an individual, although this option is extremely complicated and requires the advice of an experienced attorney and financial advisor. Finally, as USA Today points out, individuals can buy an annuity or invest the IRA in a 529 college savings plan in order to keep the money away from creditors.
Dealing with estate planning issues
As the above case shows, estate planning is often highly complex and can sometimes lead to unforeseen and unwelcome results if not taken care of properly. The recent decision from the Supreme Court should be taken extremely seriously by anyone who is worried about how their heirs will inherit their estate.
Because of the complexity involved in estate planning issues, it is always a good idea to consult with an estate planning lawyer beforehand. An experienced lawyer can use his or her expertise to make sure a person worried about an estate planning issue has the help needed to make the right decisions for their family’s future.