Court Ruling Prompts Move to Shield IRAs

In June, the United States Supreme Court ruled that an inherited IRA is no longer a retirement account and is not protected from creditors under federal bankruptcy law.  Consequently, financial advisers and families are taking steps to shield IRA assets for children and other beneficiaries in case those heirs ever find themselves in bankruptcy proceedings. 

Advisers are urging clients to create a trust as the IRA’s beneficiary, or establish an IRA as a trust account while the owner is still alive.  “The prudent thing to do, if you’re concerned about the child’s or other beneficiary’s potential creditors, is not to leave the IRA outright to the child.” 

The challenge that then arises is identifying and employing the proper trust.  The type of trust to use depends on “how many beneficiaries, the tax goals, asset-protection goals, as well as many other variables.”

The Supreme Court did not specifically address surviving spouses who inherit an IRA, thus, their status remains uncertain.  Financial advisors recommend that spouses roll over an inherited IRA into one under their own name.

See Robert Powell, Court Ruling Sparks Rush to Shield IRAs, Wall Street Journal, Oct. 12, 2014. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.