If you have an IRA, it’s probably fairly safe from creditors under federal and state law. But what happens if you name a son or daughter as IRA beneficiary? Will that IRA be exempt from an adverse decision in a lawsuit or from a divorcing ex-spouse?
* In early 2010, a Minnesota bankruptcy court said that an inherited IRA is still an IRA. Federal bankruptcy law protects IRAs, so a woman who filed for bankruptcy could keep the IRA she had inherited from her father.
* In another recent case, a Texas court went the other way. It said that a retirement plan was intended to be for retirement. An IRA you inherited is not necessarily for your retirement; in fact, you must take distributions right away, no matter how old you are. In this Texas case, an inherited IRA could be claimed by creditors.
If you are concerned that the person to whom you’d like to leave your IRA will be vulnerable to creditors, name a trust as IRA beneficiary and name your loved one as trust beneficiary. Be sure the trust has “spendthrift” language, prohibiting distributions of trust assets to parties other than the trust beneficiary.
