Mr. Baby Boomer worked hard his entire life and faithfully maxed out annual contributions to his individual retirement account (IRA). When he passed away, his daughter was devastated by the loss of her father, but thankful to inherit his IRA. Although her father didn’t know, she and her husband were going through major financial stress at the time.
After careful consideration, they filed bankruptcy with the general understanding that the law would protect IRAs. They were shocked when the bankruptcy trustee said the balance of the IRA she was inhering from her father would be used to satisfy creditors pursuant to recent U.S. Supreme Court Case. This case held that an inherited IRA is not protected by federal exemptions for retirement accounts in bankruptcy.
Anyone planning to pass IRA’s or other retirement accounts to their love ones should think carefully about protecting such valuable assets. It’s important to note the availability of Michigan’s bankruptcy exemptions (versus federal exemptions) and other statutes that exempt assets outside of the bankruptcy process. However, until Michigan courts clarify the position on the protection of an inherited IRA, it’s important to be aware of this risk while doing your estate plan.
Also, the creation of a trust for Ms. Clark (with spendthrift provisions) to receive the IRA on behalf of her would likely have protected it from creditors. This is important to keep in mind when trying to protect the inheritance for your children. If I can be of any assistance with your estate plan, feel free to contact our office.