In 2000 Ruth Heffron established a traditional IRA and named her daughter the beneficiary of the account. In 2001 Ms. Heffron died, and the account had a value of little over $450,000, and the daughter received the account electing to take monthly distributions. In 2010 the daughter filed a bankruptcy petition listing the inherited IRA as an exempt asset worth about $300,000. The bankruptcy trustee objected to the characterization as an exempt asset on the grounds the funds in the inherited IRA were not “retirement funds.” The case went through the appeal process and now the Supreme Court of the United States has ruled on June 12, 2014 that an inherited IRA is not an exempt asset.

This decision is important to anyone with substantial funds in an IRA. You die, and your child could lose the whole inherited IRA if the child has financial problems. Some states do exempt inherited IRA’s, and more states will probably consider exempting them in light of this decision. In the meantime one should review beneficiary designations on their retirement accounts. Beneficiaries should even consider taking lump sum distributions paying the tax, and investing in exempt assets!

Read the case at

Click to access 13-299_mjn0.pdf