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Game Changer: Inherited IRAs May Not Be Protected from Creditors
Traditional and Roth IRAs are typically exempt from creditors up to $1.25 million, however, this exemption does not always apply to non-spouse beneficiaries.
Courts are in disagreement as to whether inherited IRA funds constitute retirement assets, and are therefore subject to exemptions, or whether inherited IRAs are subject to different rules than those that apply to the original owners.
A Supreme Court decision is pending on the case of a Wisconsin woman who inherited a $300,000 IRA from her mother in 2001 and declared bankruptcy in 2010. Her lawyers contend that these funds should be shielded from creditors, but the argument is that these funds were not her retirement.
If these rules do indeed change, you can protect IRA funds by naming a trust as the beneficiary, and the heir as the beneficiary of the trust. The trust should be irrevocable, and set up as a see-through trust.
If you have retirement assets that could pass to your children or another non-spouse beneficiary, this would be a good time to consult with your financial advisor.
[Source: Wall Street Journal]
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