Inherited IRAs are not protected retirement funds. They are subject to creditors’ claims if the beneficiary files for bankruptcy. The Supreme Court decided that inherited IRA accounts were not protected retirement funds since the beneficiaries of these accounts were required to withdraw a minimum amount of money each year regardless of whether these beneficiaries are retired. In the case of bankrupt estates, inherited IRAs will now be considered assets—fully available to satisfy creditors’ claims. It seems obvious that the holding can be expanded to permit other predators and creditors to collect from inherited IRA accounts.
If you want to protect these hard earned assets, a Standalone Retirement Trust should be established in order to protect your assets without restricting the beneficiary’s access to the funds. Upon the retirement plan participant’s passing, his or her funds will flow into the third-party trust instead of passing directly to the beneficiary. Because the beneficiary does not establish the trust, doesn’t fund the trust with his or her own money, and cannot modify the trust, the trust will be protected from the claims of the beneficiary’s creditors. However, the IRA assets continue to grow at a tax deferred rate “stretched“ over the lifetime of the beneficiary.