Charlotte Bankruptcy attorney Bryan W. Stone answers the question: “Are my 401k and IRA protected in bankruptcy?”
The Supreme Court recently made waves in the bankruptcy world when it released an opinion in Clark v. Rameker, a case concerning the exemption for inherited IRAs. In Clark, the justices agreed unanimously that the inherited IRA Ms. Clark received from her mother was not eligible for protection from creditors.
The case began back in 2010, when the Clarks filed for Chapter 7 bankruptcy. Ten years before filing, Ms. Clark had received the IRA from the estate of her deceased mother. At the time of the bankruptcy filing, Ms. Clark and her husband listed the IRA as an asset, valued at around $300,000, but said that it was exempt from the overall bankruptcy estate. The couple argued that the money should be protected against claims by creditors, something that the trustee disagreed with.
The bankruptcy trustee overseeing the case, as well as the Clarks’ creditors, fought the couple over the claimed exemption. The creditors argued that because the money was not the actual retirement money of Ms. Clark it should not be exempted under the usual retirement fund heading.
The case eventually made its way to the Supreme Court where Justice Sonia Sotomayor pointed out several ways in which the inherited IRA differs from a person’s personal IRA savings. The Court noted that in traditional IRAs, a person can continue to invest money in the account, whereas those with inherited IRAs cannot. Most importantly, those who hold inherited IRAs are allowed to withdraw any or all of the money in the account for any reason without ever incurring a penalty. Those with traditional IRAs face a 10 percent penalty for early withdrawals.
Given these differences, the Court decided that the money held in inherited IRA accounts could not objectively be viewed as retirement savings and, as a result, are not exempt from the reach of creditors. The money in the IRA will now be deemed part of the Clarks’ overall bankruptcy estate and the funds can be used to pay back creditors.
In the future, those intending to leave money to their family members in the form of an IRA might need to consider different strategies to ensure the money actually reaches your heirs. One way of shielding the money from potential creditors is to place the IRA inside a trust that exists with your heirs as the beneficiaries.
If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC today at (704) 370-2828 or find additional resources here. As professionals who are experienced in the bankruptcy arena, our attorneys will provide you with the best advice for your particular situation.
About the Author
Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.
Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.
In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.
“Advisers proceed with caution following inherited IRA ruling,” by Darla Mercado, published at InvestmentNews.com.
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