Just today a bankruptcy court in Florida reached the same conclusion; inherited IRAs do not have asset protection, inherited IRAs are not exempt assets.
This is really going to be important in future years as various studies show that most people really don’t want to ever use their IRA money during their lives. Sure, if there is an emergency, or they want to pay for a family cruise, they may tap into the nest egg, but in most polls, people say they plan for their IRA to be legacy money. That is to say funds they just want to pass on to the next generation.
Financial planners have even devoted most of their marketing campaigns to promoting the concept of “stretch” IRAs. IRAs that can be stretched over the lifetime of the next generation.
One major problem with these concepts; bankruptcy. What is the point of building up and stretching a big nest egg if it can just be taken away in one fell swoop? IRAs are only exempt from creditors if they meet the definition of a retirement plan as put forth in the tax code. More and more bankruptcy courts are declaring that inherited IRAs don’t meet that definition and thus aren’t protected.
Since the court determined inherited IRAs are not exempt assets, all the assets that it took a lifetime to accumulate inside the IRA are now up for grabs. The real sad aspect is the simple use of a Family Owned Retirement Trust, or other basic steps could have protected the IRA.
We have devoted a special page on our web site as to the asset protection status of inherited IRAs, listing all of the known court cases on the subject.