Bankruptcy Protection for Inherited IRA’s

An important issue affecting many estate plans will soon be decided by the United States Supreme Court. Estate planners are often confronted with the question of whether their clients should leave their IRA’s outright to their heirs or whether to leave the IRA’s in trust.  The case to be decided by the Supreme Court, Clark v. Rameker, involved Heidi Heffron-Clark who inherited an IRA from her mother. Mrs. Heffron-Clark and her husband subsequently filed for bankruptcy. Usually retirement accounts are protected in bankruptcy proceedings.  In this case the bankruptcy judge held that the inherited IRA was not protected because the funds in an inherited IRA may be withdrawn and are not solely for the heir’s retirement.

The bankruptcy court decision was appealed to a federal district court which held for Mrs. Heffron-Clark.  When that decision was appealed to the Seventh Circuit Court of Appeals the decision of the bankruptcy judge was upheld.

The Supreme Court will decide the issue because there is a conflict of the Seventh Circuit and the Fifth Circuit and Eighth Circuit Courts of Appeals. The Fifth and Eighth circuits have previously held that the inherited IRA’s are protected because the protection is for the IRA regardless of whether it is inherited or not.

Planners and clients wanting to avoid this uncertainty should use trusts to protect their heirs’ inherited IRA’s while awaiting the Supreme Court decision.