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Supreme Court Rules Inherited IRAs are NOT Protected in Bankruptcy

by Phil Levin, Esq. on June 17th, 2014

On June 12, 2014, the U.S. Supreme Court unanimously ruled in the Clark decision that funds held in inherited IRAs are NOT “retirement funds” within the meaning of §522(b)(3)(C) of the bankruptcy code and therefore are NOT protected in bankruptcy. The decision can be found here.

Before this Supreme Court decision, it was clear that IRAs were exempt from the claims of creditors in the event of bankruptcy.  However, whether an inherited IRA was subject to the same protection had varying precedent throughout the country.

The decision in Clark is another significant reason why designating a qualified trust as beneficiary of an IRA is an important planning strategy for clients who desire asset protection for beneficiaries of their tax-deferred individual retirement accounts.

This decision greatly strengthens our long-standing position that IRAs should be payable to a Retirement Plan Trust when asset protection is desired. Of course, these Trusts need to be adroitly drafted, by competent legal counsel, and include the proper discretionary distribution standards.

Please contact Philip Levin, Esq. at The Levin Law Firm to discuss the benefits of establishing an IRA Inheritance Trust for your selected clients. To arrange a Complimentary Consultation, please call Laura or Jennifer at (610) 977-2443.

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