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Adam Mack, JD
Hillary Stirling, research assistant
As we discussed elsewhere, retirement accounts are generally exemptin bankruptcy, but this summer the Supreme Court of the United States declared that one form of retirement account isn't entitled to protection in bankruptcy: the inherited IRA. This Court decision has far-reaching ramifications for both estate planning and bankruptcy.
If the Inheritor is Not the Spouse
If the person inheriting the IRA is anyone other than the spouse, then the IRA is considered a non-exempt asset. The Court cited several reasons for interpreting the law this way. For example, the inheritor cannot add money to the inherited IRA, nor would he or she incur a penalty for withdrawing money early from the inherited IRA. Also, the inheritor MUST withdraw money from the account. These factors indicated to the Court that once the originator of the inherited IRA dies, the inherited IRA is no longer a retirement account but is an asset account and the distributions from it are considered income.
If the Inheritor is the Spouse
If the person inheriting the IRA is the spouse of the IRA's originator, then he or she has options that others do not. He or she can directly roll the inherited IRA funds into his or her own IRA, preserving the exemption in the event of a bankruptcy. Of course, doing that "locks away" that money until he or she reaches retirement age, but it also locks it away from creditors in a bankruptcy since Kansas has a generous retirement account exemption.
The Most Important Part
ven though the Supreme Court has now declared inherited IRA's to be non-exempt assets in a bankruptcy, you do have options. A qualified Kansas bankruptcy attorney can help you explore the financial and legal pros and cons of those options. Contact us today to set up a free consultation to learn more!