70 West Madison St.
Chicago, Illinois 60602
How Safe Is Your Retirement Nest
you’ve transferred your 401(k) retirement nest egg into an
individual retirement account (IRA). This gives you more control
over management and distribution of IRA assets. But, you may have
concerns about creditors and their ability to attack your retirement
assets, which are now conveniently consolidated from several
employer plans into one convenient IRA. Will those IRA assets be
protected from creditors regardless of what happens to you?
sponsored retirement plans, such as 401(k) plans, are protected from
creditors by the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (the “Act”) as well as a specific ERISA
statutory provision. The Act also protects other “retirement
funds” like IRAs, in an aggregate amount of up to $1,000,000
(indexed for cost of living increases and now set at $1,245,475).
The protection from creditors is implemented through an exemption
from the assets available to creditors in bankruptcy, and this
protection is available on a nation-wide basis (individual states
can elect alternative exemptions).
“inherited” IRAs set up on the death of an IRA holder for a
named beneficiary fall within the category of “retirement funds”
protected by the Act? The U.S. Supreme Court recently considered
this issue in Clark
v. Rameker, a case involving the assets of a mother’s IRA
inherited by the named beneficiary (her daughter) upon the
mother’s death. The daughter subsequently filed for bankruptcy and
the IRA assets were claimed to be part of the daughter’s
bankruptcy estate to be shared by her creditors. The Supreme Court
concluded that such inherited IRAs are not
retirement funds in the hands of the beneficiary (in this case, a
non-spouse beneficiary) who may be a younger family member many
years from retirement, and so such inherited IRAs are not protected
from creditors by the Act. Left undecided by the Supreme Court is
the status of inherited IRAs benefitting surviving spouses
(favorable language in the lower court opinion in Clark
suggests that inherited IRAs in the hands of a surviving spouse
continue to be retirement funds).
Supreme Court’s decision does not deal with bankruptcy protection
of retirement funds like IRAs in those states which have bankruptcy
exemptions that are not based on federal law. For example,
Illinois law provides an exemption for assets of “retirement
plans” in bankruptcy. Although inherited IRAs with non-spouse
beneficiaries are generally regarded as not
protected by the Illinois statutory exemption, the status of
inherited IRAs in the hands of surviving spouses remains an open
does an inherited IRA work? When an IRA owner dies, an inherited
IRA is created by simply changing the title to the existing IRA. For
example, if a family trust is the beneficiary, the inherited IRA
might be retitled the “Donald Trumpe Family Trust as Beneficiary
of the Donald Trumpe Inherited IRA.” Funds do not
have to be transferred from the IRA to the beneficiary except as
otherwise required by the required minimum distribution (RMD) rules.
Bear in mind that if the deceased IRA owner had attained age 70 ½
and had been taking required minimum distributions, any
distributions not yet made for the year of the owner’s death will
still have to be made to
the designated beneficiary by the end of that year.
inherited IRA is not like the beneficiary’s personal IRA unless
the beneficiary is a surviving spouse. A surviving spouse can
roll over funds into and out of an inherited IRA. A non-spouse
beneficiary cannot although non-spouse beneficiaries can make direct
trustee-to-trustee transfers to a different IRA custodian (but be
careful – it’s still an inherited IRA, not your IRA, and a
non-spouse beneficiary cannot make any additional contributions to
Overall, IRA funds dwarf the amount of retirement assets held in
employer sponsored retirement plans. Those IRAs will offer tempting
targets to creditors when they pass on death to beneficiaries other
than a surviving spouse. Consider leaving retirement assets in your
employer sponsored plans, where protection from creditors is
assured, as long as possible. Alternatively, for assets currently
held in an IRA, consider retaining the spouse as the primary
beneficiary (that appears to be safe for now) and naming only a
spendthrift trust as the alternative beneficiary (this can get
complicated, so proceed with caution – and professional advice).
Other asset protection strategies may make sense for assets held
outside retirement accounts, but carefully consider those options
with advice from an experienced tax or benefits advisor.
Golan & Christie LLP
70 West Madison St.
Chicago, Illinois 60602