Retirement & Financial Planning Report

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provides that traditional IRAs and Roth IRAs are protected from creditors, to a considerable extent. In non-bankruptcy situations, many states extend some creditor protection to IRAs. Therefore, you might assume than an inherited IRA would be protected, too.

However, that may not be true. The issue has been tried in bankruptcy court six times in six different jurisdictions, within the past nine years, and each bankruptcy court ruled that an inherited IRA does not enjoy creditor protection. In general, the courts said that an inherited IRA is not a retirement account, so creditor protection is lost.

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These courts indicated that an IRA inherited by a spouse would enjoy protection. If you intend to leave your IRA to a nonspouse and creditor protection is a concern, you can leave your IRA to an irrevocable trust, naming the nonspouse as trust beneficiary. The trust should give the trustee discretion over distributions and it should have “spendthrift” language to thwart creditors of the beneficiary.