Estate Planning Alert: Inherited IRAs and Creditor Protection


When an IRA owner dies, an "inherited IRA" (or "beneficiary IRA") generally is established for each beneficiary. During the IRA owner's lifetime, an IRA generally is protected from creditors under both Ohio and Michigan law, and federal bankruptcy law protects most IRAs. However, state courts are divided on whether an inherited IRA is entitled to creditor protection. In Clark v. Rameker, the U.S. Supreme Court recently ruled unanimously that inherited IRAs are not exempt in bankruptcy. The Court reasoned that an inherited IRA is not a "retirement fund," because, unlike an IRA during the owner's life, (i) the owner of an inherited IRA may never make additional contributions to the account, (ii) the owner of an inherited IRA is required to take minimum distributions regardless of age, and (iii) the owner of an inherited IRA may take distributions at any time without penalty (though not without income tax). However, Ohio law (but not Michigan law) recently has been amended to exempt inherited IRAs from creditors. Therefore, whether in or outside bankruptcy, an inherited IRA owned by an Ohio resident generally is exempt from creditors.

Should you have any questions regarding IRAs, please contact one of our estate planning attorneys.