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To be or not to be a retirement fund: The Supreme Court rules p2

We are talking about a recent U.S. Supreme Court decision regarding retirement funds and bankruptcy. The case is not from Texas, but any court in Texas will have to follow the decision. The decision is important to us because it could have an impact on estate planning and how we all handle our retirement funds.

The plaintiff is a couple who were facing bankruptcy. Chapter 7 bankruptcy is generally referred to as "liquidation," a term that may be misleading. It may sound as if every asset owned by a debtor would be turned into cash to pay off creditors, but that is not quite the case. Under federal law and state law (including Texas), there are exemptions, assets that the bankruptcy trustee cannot touch, assets that do not become part of the bankruptcy estate.

Retirement funds are exempt in the plaintiffs' state, under federal law and, for that matter, in Texas. The wife's mother had passed away and left her retirement account to her daughter. That money, the plaintiffs reasoned, should be off limits to creditors as a retirement fund.

The bankruptcy trustee disagreed. The trustee argued that the rule in question only protected a debtor's own retirement account, not the proceeds of an inherited account. The plaintiffs appealed the decision to the district court and prevailed. The bankruptcy trustee appealed to the 7th U.S. Circuit Court of Appeals, which reversed the district court. The plaintiffs appealed to the Supreme Court, which, with this decision, upholds the appellate ruling.

It was a long road for the plaintiffs, but they did succeed in settling a question that had gnawed at others in similar situations.

In our next post, we will get into the arguments posed by both sides.

Source: Courthouse News, "Inherited IRAs Aren't Creditor-Safe, Court Says," Barbara Leonard, June 12, 2014

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