Executive Summary: Asset Protection for Inherited IRAs

• Author: Seymour Goldberg
• Profession: Senior partner in the law firm of Goldberg & Goldberg, P.C., in Woodbury, New York
• Pages: 91-92

91

EXECUTIVE SUMMARY:

ASSET PROTECTION

FOR INHERITED IRAS

An issue that is developing throughout the country involves whether or

not an inherited IRA is protected from the creditors of the beneficiary

or beneficiaries of the inherited IRA. The issue can involve a nonbank-

ruptcy proceeding as well as a bankr uptcy proceeding.

In order to avoid the issue, to the extent possible, the IRA owner

may consider establishing a spendthrift IR A trust as the beneficiary

of his/her IRA. It is impossible to determine what creditor rights

problems the direct beneficiary of an inherited IR A may have at a

later date or to determine the state that the beneficiar y may ultimately

reside in. It may take decades during a shake-out period to determine

the creditor rights protection by the state courts regarding the credi-

tor rights protection that is available to the direct beneficiar y of an

inherited IRA.

In the bank ruptcy context, a number of ban kruptcy courts, but not

all, have held that the direct benef iciary of an inherited IRA is protected

from his/her creditors. This issue will eventually have to be litigated in

the U.S. Supreme Court. The issue in the bankruptc y court is whether

or not an inherited IRA is considered to be protected as a “retirement

fund” under the Bankruptcy Code.

Once again an IR A trust with spendthr ift trust provisions may

avoid litigation issues in the bankruptc y court.

An IR A trust should be considered as the beneficiary of an IRA

account if:

1. The beneficiary is a m inor.

2. The beneficiary is disabled or not competent.

3. The beneficiary has actual or potential liabilities to creditors.

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