October 24, 2011
Authored by: Kathy Sherby and Stephanie Moll
During a participant’s lifetime, his or her IRA is considered “retirement funds” that are protected from the participant’s creditors, even if the participant files bankruptcy. But, what happens to the creditor protection after the participant’s death? Is the IRA now protected from the beneficiary’s creditors? Whether post-death creditor protection is available to inherited IRAs under the 2005 Bankruptcy Act has been the subject of a number of cases decided in the last year.
The argument made by bankruptcy trustees is that, on the death of the initial IRA owner, the IRA ceases to be “retirement funds”, as it is not the retirement funds of the beneficiary, and therefore loses the protection afforded to the IRAs under the Bankruptcy Code.