The U.S. Supreme Court has ruled that inherited IRAs are not protected in bankruptcy like those that you set up and fund yourself. The Court noted that true IRA owners are subject to penalties designed to encourage them to keep the money available for retirement. These penalties justify the “retirement funds” exemption for true IRA owners. Because money in an inherited IRA allows easy penalty free withdrawals, the Court held that the “retirement funds” exemption does not apply. This will likely make spousal rollovers more popular. A spouse who inherits an IRA has the ability to roll the assets into her own IRA to maximize tax savings and have the protection of the “retirement funds” bankruptcy exemption. If the spouse chooses not to rollover, the account is considered an inherited IRA and those assets would not be protected in bankruptcy.
One option to protect inherited IRAs is a Standalone Retirement Trust. If you would like more information about Standalone Retirement Trusts, please call our office.