In a decision bound to have far reaching implications, the Supreme Court
of the United States resolved a near decade-long split amongst circuit
courts: Are inherited IRA funds protected in bankruptcy? In a unanimous
decision the Court held (9-0) that such funds are not protected from the
reach of creditors in bankruptcy. The Court's reasoned that there
are several features that distinguish inherited IRA's from self-funded
IRA's. Inheritors cannot contribute additional funds into the account
and they can withdraw funds from their inherited IRA at any time without
penalty. Leading the Court to conclude that, inherited IRA's do not
receive the same protection from creditors as retirement assets receive
Despite the Supreme Court's decision, if state law allows the exemption,
inherited IRA's are then exempted from the reach of creditors. Inherited
IRA's are just not exempt under 522(b)(3)(c) of the bankruptcy code
because of the retirement funds limitations. Thankfully, in 2011 Governor
Scott signed into law a bill that overturns a previous court ruling which
held that inherited IRA's looses its protection from garnishment of
creditors. This law exempts inherited IRA's from creditor claims and
applies retrospectively to all inherited IRA accounts.
However, there are guidelines which an IRA must satisfy in order to be
claimed exempt from the reach of creditors. There are limitations as to
how much is protected, and when the funds were deposited into the IRA.
Due to the complexity of IRA's in bankruptcy, if you own an IRA and
are considering filing for bankruptcy, be sure to consult with an attorney
prior to filing.