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Supreme Court retirement account ruling shakes up estate planning

Court rules that inherited IRAs cannot be considered retirement accounts

In a landmark decision, the Supreme Court ruled recently that inherited individual retirement accounts (IRA) are not protected from creditors during bankruptcy, according to NPR. The ruling clarifies a key ambiguity in the law and could mean big changes for the estate plans of many Americans. The court’s decision hinged on whether an IRA continues to be a retirement account once the IRA has been inherited by another party.

Inherited IRAs vs. IRAs

Under federal law, retirement accounts are protected from being seized by creditors during bankruptcy as a way of ensuring that people have funds to survive on once they stop working. In this case, a woman had inherited her mother’s IRA and sometime later declared bankruptcy.

The woman argued that her inherited IRA was a retirement fund, as the IRA had originally been for her mother, and should therefore be protected from creditors. The woman and her creditors had been through several rounds of appeals in the Wisconsin court system before the case was heard by the Supreme Court.

Inherited IRAs are not retirement funds

The Supreme Court settled the issue by disagreeing with the woman’s argument. The court declared that an inherited IRA is not a retirement account and should therefore not be protected from creditors. As Forbes reports, the court said that holders of an inherited IRA cannot contribute to the fund and, instead of being encouraged to put the money aside for retirement, are actually required to withdraw the money within roughly five years.

The decision means big changes for the estate plans of many Americans, including those living in Colorado. While some states protect inherited IRAs from creditors, Colorado is not one of them. However, people receiving or bequeathing an inherited IRA do have options. Spouses, for example, can roll their deceased spouse’s IRAs into their own, thus protecting them from creditors.

Estate planning concerns

The Supreme Court’s ruling shows just how important it is for people to make sure their estate plan is updated and always takes advantage of changing financial and legal regulations. Unfortunately, an estate plan is something that far too many people approach only sporadically.

Estate planning, however, is something that needs to be constantly revisited and revised. Anybody concerned about their own estate plan should contact a qualified estate planning law firm as soon as possible. The right legal guidance is often the key to making sure that one’s assets and even medical care are properly protected well into the future.