Is an Inherited IRA Shielded from Creditors?

IRA piggy bank

You may name a beneficiary for your Individual Retirement Account (IRA) so that they may collect your remaining funds at the time of your unfortunate passing. Specifically, these remaining funds may transfer over into what is known as an inherited IRA. This account may grant them tax-deferred earnings for years to come. However, this is unless they hit a financial snag and have no choice but to file a bankruptcy petition. In this case, their creditors may attempt to infringe upon these funds to make up for their due payments. Follow along to find out whether an inherited IRA account is shielded from creditors and how a proficient Putnam County estate planning attorney at the Law Office of Andres D. Gil, PLLC can work to safeguard your beneficiaries from such collection activities.

Is an inherited IRA shielded from collections by your beneficiary’s creditors?

On June 12, 2014, the United States Supreme Court unanimously ruled that inherited IRAs must not be considered traditional retirement accounts at times of bankruptcy. Therefore, this ruling means that these funds must not be protected by the collection activities of the beneficiary’s creditors. Of note, the only exception to this is if the owner of an inherited IRA was the spouse of the original IRA holder.

The reason why the Supreme Court holds that this should not be considered a retirement account in this setting is because the beneficiary is not forced to delay their distributions until retirement. Rather, they are allowed to withdraw these funds at any rate and at any time. Therefore, the Court does not see anything holding back the beneficiary from taking these funds or even clearing this account to satisfy their creditors during their petitioned bankruptcy proceedings.

It is worth mentioning that, for similar reasonings, an inherited IRA is also not shielded from collections during a beneficiary’s divorce proceedings.

What types of assets are shielded from creditors’ collections?

You must understand that the assets you place in a trust may be shielded from collections by your beneficiary’s creditors. With that being said, it may be a smarter strategy to name a trust as the beneficiary of your IRA. Then, you may name your truly desired beneficiary as the beneficiary of your trust. In this way, a trustee may distribute these assets to your trust’s beneficiary at the time of your passing or at the time specified within your trust’s terms. Overall, this is an indirect way of getting your truly desired beneficiary the same funds they were always entitled to.

To allow proper protections to be implemented, it is in your best interest to retain the services of a talented Putnam County estate planning attorney. Contact the Law Office of Andres D. Gil, PLLC today.

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