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U.S. Supreme Court looks at IRA inheritances in bankruptcy

Many persons facing insuperable financial challenges are pleasantly surprised when they learn through a consultation with an experienced bankruptcy attorney that they can retain many of the assets they thought they would lose in a Chapter 7 bankruptcy proceeding.

In fact, the fears of many persons who are simply seeking to gain a fresh financial start after suffering from an unexpected medical bill, job loss or other material setback are often misplaced. Bankruptcy clients are often elated to learn that they can keep their home, their automobile, certain household goods and furnishings, clothes, book, tools of trade and other assets that are deemed exempt from the grasp of creditors.

What about inherited retirement assets, though? Is money held in an individual retirement account that a parent passes along to a child, for example, shielded from bankruptcy creditors?

That is precisely the question that was recently entertained by United States Supreme Court justices, who heard appellate arguments late last month in a bankruptcy case involving IRA assets.

In that case, a woman inherited IRA money from her mother. A bankruptcy trustee tried to take it from her, arguing that its off-limits status was no longer applicable once it was inherited.

The country’s highest court took the case because lower federal courts have been inconsistent in their rulings regarding how inherited IRA money should be construed.

The court’s ruling -- which is expected to be announced sometime in June -- is timely, given the nearly $6 trillion that is estimated to be in sheltered retirement accounts. Much of that will potentially be inherited, and an ultimate judicial determination regarding whether inherited IRAs are off limits to bankruptcy creditors will lend critically needed guidance to lower courts.

Source: The Wall Street Journal, “U.S. Supreme Court hears bankruptcy fight over inherited IRA money,” Katy Stech, March 25, 2014

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