Under current federal bankruptcy code, an exemption applies for certain tax-qualified retirement funds and accounts including assets such as many 401Ks, annuity plans, IRAs, qualified governmental plans, deferred compensation plans (state and local) and some tax-exempt organizations.
However, a Bankruptcy Court has concluded that, unlike a debtor's own traditional individual retirement account (IRA), a debtor's inherited IRA is not an exempt asset of her bankruptcy estate under Bankruptcy Code §522(d)(12). This ruling underscores the importance of having your personal finances and estate plan working together, including coordinating the beneficiary designation of tax-qualified retirement accounts, annuities and IRAs with your estate plan.
The impact of this Bankruptcy Court’s ruling was that the debtor’s interest in the IRA which he inherited from his parent was fully accessible (and therefore taken) by his creditor. This ruling is consistent with a number of court cases in various states which have held that a debtor’s inherited IRA was not protected from the debtor’s creditors.
If your estate plan is structured to help protect your heirs’ inheritance from their creditors, and if part of your assets include tax-qualified retirement accounts, annuities and IRAs, then you must take this Bankruptcy Court’s ruling into account when structuring your estate plan, by creating a standalone IRA Trust to be the beneficiary of your tax-qualified retirement accounts, annuities and IRAs.
Note these other important conditions: