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To be or not to be a retirement fund: The Supreme Court rules p3

We are talking about retirement funds and how the Bankruptcy Code treats them. The U.S. Supreme Court recently decided one issue that federal appellate courts had disagreed on. The decision is about inherited retirement funds, and it could change the way Texans approach their estate plans.

Bankruptcy is not usually the first thing a person thinks about during the estate planning process. When deciding what will happen with your assets after your death, you generally consider whether a grandchild needs money for college or a child has special needs. You will think about what your family could need and what would mean something to them or make a difference in their lives. You also consider the tax consequences of each bequest.

Chances are, though, that you do not start every discussion about every bequest with, "If this heir declares bankruptcy shortly after my death, how can I protect his or her inheritance from creditors?" Judging by this case, though, even if it is not your first consideration, you may want to ask the question at some point.

In this case, a woman argued that the money she inherited as the beneficiary of her mother's IRA should be treated as a retirement fund in her and her husband's bankruptcy. The Supreme Court said no, because the money was not set aside by the woman for her own retirement.

The bankruptcy code allows debtors to hold onto "retirement funds" themselves instead of adding the account to the list of assets that the trustee can use to pay off creditors. The code, however, is a little fuzzy on what constitutes a retirement account. This decision settles that question: To be exempt, the retirement account must belong to the debtor, with funds set aside by the debtor for the debtor's retirement.

An inherited IRA is different in significant ways from an IRA owned by the debtor. First, the beneficiary cannot add to the account. Further, the heir must withdraw money from the IRA, even if the heir is years away from retirement. The law also allows the heir to withdraw funds from the IRA at any time without penalty, and those funds can be used for anything under the sun.

We will finish this up in our next post.


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

Clark v. Rameker, 134 S.Ct. 2242 (U.S.,2014), via Westlaw

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