Supreme Court rules on inherited IRAs

Supreme Court rules on inherited IRAs

The Supreme Court ruled June 12 that inherited individual retirement accounts, also known as inherited IRAs, are not protected from creditors in bankruptcy proceedings, according to Reuters. As baby boomers die and pass on their assets to their children, this ruling is likely to have wide-reaching effects.

The case before the Supreme Court began in March, and centers around a 2010 bankruptcy, declared by Heidi Heffron-Clark and husband Brandon Clark when their shop closed, the news source explained. The Clarks held approximately $300,000 in an IRA that Heffron-Clark had inherited from her mother nine years prior. They owed roughly $700,000 to their creditors.

Generally, IRAs are protected from creditors in a bankruptcy under the umbrella of protecting debtors’ “essential needs,” according to Reuters. Retirement security is considered to be an essential need, but the trustee administering the Clarks’ estate felt that key differences to an IRA that is inherited meant that it does not fall under the purview of this category.

“Nothing about the inherited IRA’s legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete,” the ruling said, according to the news source.

The most notable effects of this ruling apply to spouses, Forbes explained. In the event that a spouse dies and leaves an IRA to his or her surviving spouse, that spouse has two options – rolling the IRA into his or her own IRA, or taking that money out. This ruling provides yet another incentive for the surviving spouse to rollover the IRA, because this is the only circumstance in which it would be protected from a potential bankruptcy.

If you have any questions about this post or would like to discuss your company’s creditors’ rights and bankruptcy matters , please contact me, Joel R. Glucksman at ScarinciHollenbeck.com.