Individual Retirement Accounts (IRAs) are a popular way to save for retirement. They offer tax advantages and, under federal bankruptcy law, protection from creditors. But what happens when you inherit an IRA from a loved one? Is that protection still available?
This question became especially important after a 2014 U.S. Supreme Court ruling, and the answer depends in large part on where you live.
What Did the Supreme Court Decide About Inherited IRAs?
In Clark v. Rameker (2014), the Supreme Court ruled that inherited IRAs are not considered “retirement funds” under federal bankruptcy law. This means that, outside of state-level protections, inherited IRAs can be claimed by creditors in bankruptcy proceedings.
The Court highlighted three reasons why inherited IRAs differ from traditional retirement accounts:
- You cannot add money to an inherited IRA.
- You must take required minimum distributions, even if you are decades away from retirement.
- You can withdraw more than the minimum amount at any time without penalty.
Because of these characteristics, the Court concluded that inherited IRAs are more like inherited assets than retirement savings. As a result, they no longer qualify for federal bankruptcy protection.
Are Spousal IRAs Treated Differently?
Yes. If a surviving spouse inherits an IRA, they can roll it over into their own retirement account. Once rolled over, the IRA is treated like any other retirement fund, with continued tax deferral and federal protection from creditors.
However, this only applies to spousal rollovers. Non-spouse beneficiaries, such as children or grandchildren, cannot roll over an inherited IRA in the same way.
How Are Inherited IRAs Treated in Florida?
Florida offers stronger protections than federal law. State law specifically shields inherited IRAs from creditors when the beneficiary is a Florida resident. This means that if you live in Florida and inherit an IRA, you may keep those assets safe in the event of bankruptcy.
It is important to note, though, that protections apply based on the beneficiary’s domicile. For example:
- If you live in Florida and inherit an IRA, you may be protected.
- If your children live outside Florida, they will not benefit from Florida’s protections, even if the original account holder lived in Florida.
Can You Protect an Inherited IRA With a Trust?
Another option is to name a trust, not an individual, as the beneficiary of the IRA. While the law in this area is still developing, leaving an IRA to an irrevocable “retirement benefits trust” may offer stronger protection from creditors.
A trust can also provide other benefits, such as:
- Extending tax-deferred growth over the lifetime of the oldest beneficiary.
- Controlling how and when beneficiaries receive distributions.
- Protecting against lawsuits, divorce settlements, or irresponsible spending.
- Providing long-term planning for beneficiaries with special needs.
How Can an Estate Planning Attorney Help?
Planning for how your retirement accounts will pass to loved ones requires careful thought. The Supreme Court’s decision makes it clear that federal protections alone are not enough. Florida law offers unique advantages, but beneficiaries in other states may be left exposed.
At Verras Law, we help clients throughout Florida design estate plans that safeguard inherited IRAs and other assets. Whether that means using a trust, structuring spousal rollovers, or applying Florida’s state-level protections, we will guide you through the process.
Protect Your Family’s Inheritance
If you have questions about inherited IRAs or how to protect retirement assets from creditors, now is the time to act. We can help you understand your options and create a plan that protects your family’s financial future.
Contact Verras Law today to schedule a consultation and learn how we can help you preserve your legacy.