I recently had a discussion about inherited IRA’s which reminded me of a big Supreme Court decision from this last year. This has big repercussions on anyone who will potentially have an IRA they plan on passing on to their children. So, I thought I'd get out a quick summary of what it is and how it might affect you.
There was a law passed in 2014 by the Supreme Court which says that Inherited IRAs are not protected from creditors in bankruptcy. This is a huge deal! What does this mean and why is it so important?
If you have an IRA, you die, and you leave it to your children and one of those children is sued because they owe creditors money and have to file bankruptcy the money in the IRA is not protected. This means your money could go right to their creditors instead of your children as intended. If you have an IRA you need to consider this before choosing the beneficiaries on your account.
Are your children having any financial issues, in debt or having any other financial difficulty? If they are the money might be going to their creditors instead. Consider leaving the money to a spendthrift trust on behalf of your children. The will protect it from their creditors. Estate planning is a family affair and you need to think very carefully when making your beneficiary designations.
It’s still ok to leave an IRA to a spouse. They will keep the creditor protection on this account because they’re still considered retirement assets.
Discuss this with your financial advisor if you have any concerns about this.