In a recent decision, the Supreme Court in Clark v. Rameker held that, after the death of the IRA owner, assets in an inherited IRA for a non-spouse beneficiary are not “retirement funds,” and, therefore, are not protected from the claims of creditors of the non-spouse beneficiary. According to the Court in Clark, unlike the initial contributor to an IRA or his or her spouse, inherited IRA owners (i) cannot contribute additional funds to the IRA account, (ii) must take withdrawals at least on an annual basis, and (iii) are not subject to any age-related penalties for withdrawals.
The implications of this opinion may lead many individuals who have substantial retirement accounts or IRAs to update their estate planning documents to protect their beneficiaries from the claims of creditors. Creditor problems could include the claims of a divorcing spouse as well as more traditional creditors (e.g., consumer loan providers). An IRA owner may be able to protect his or her beneficiaries from creditors by designating a spendthrift trust as the beneficiary of the inherited IRA. If a spendthrift trust is designated as the beneficiary of an inherited IRA, the assets of the trust, including the inherited IRA, should enjoy protection from the claims of the beneficiaries’ creditors.
It is important to note that some states have specific statutes that currently continue to protect inherited IRAs from creditors’ claims.