When filing for bankruptcy, many consider the IRA (Individual Retirement Arrangement) and 401K exemption as the most well-known of the exemptions. This exemption allows individuals who must file bankruptcy the ability to keep their treasured retirement accounts out of their bankruptcy estate and safe from their creditors. In turn, this allows the individual to emerge from bankruptcy with their retirement accounts still 100% intact and en route to a fresh start.
But what happens if the IRA was not originally yours? What if it was inherited? Is it still safe from your creditors in bankruptcy? The answer is yes and no. If you inherited your IRA from your spouse, then it will still have the same protections as if the IRA was originally yours. However, if you inherited the IRA from someone other than your spouse, then it will not qualify for the exemption. Thus, it will be considered part of your bankruptcy estate and subject to the claims of your creditors.
The Supreme Court handed down this ruling in Clark v. Rameker ,134 S. Ct. 2242 (2014). In this case, a daughter inherited an IRA from her mother in the amount of $450,000. After a business failure, the daughter was forced to file bankruptcy and claimed that her inherited IRA from her mother was exempt. The Supreme Court surprised many when it ruled that an inherited IRA from someone other than a spouse, is not protected by the exemption. However, there are seven states that have made their own Bankruptcy Rules that differ from the Supreme Court’s decision. The states of Florida, Ohio, North Carolina, Missouri, Texas, Arizona, and Alaska amended their state bankruptcy laws to overshadow the Supreme Court decisions.
Inherited IRAs Outside of Bankruptcy
What if you are not filing bankruptcy? Is your inherited IRA protected from your creditors? After the Supreme Court’s ruling, the answer is not very clear on the federal level. Therefore, you must look to your specific state’s laws regarding what types of assets are protected from creditors when you are not filing bankruptcy in your state. Some states already have very specific laws in place that protect inherited IRAs. In these states (Florida, Ohio, North Carolina, Missouri, Texas, Arizona, and Alaska), your inherited IRA is most likely protected.
Specifically under Florida Statute § 222.21(2), as long as an inherited IRA is “[m]aintained in accordance with a plan or governing instrument that has been determined by the Internal Revenue Service to be exempt from taxation under s. 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s. 414, s. 457(b), or s. 501(a) of the Internal Revenue Code of 1986, as amended, unless it has been subsequently determined that the plan or governing instrument is not exempt from taxation in a proceeding that has become final and nonappealable,” it will be protected from your creditors.
Regardless, it is always a better practice to have beneficiaries of an IRA be that of a properly drafted trust to ensure the asset is safe to leave to the beneficiary. You never know where a beneficiary might be living. If they are outside of Florida, the IRA might not be safe.
Regardless, if you believe your inherited IRA will be protected if you file bankruptcy, you should always confirm with a bankruptcy attorney before filing. If you file a Chapter 7 Bankruptcy and then learn that your inherited 401K will not be protected, there will be very little that can be done at that point to protect the IRA. Contact the Law Office of David M Goldman, PLLC today.