In Clark v. Rameker, the United States Supreme Court recently (June 2014) decided that inherited IRAs were not entitled to bankruptcy protection under the federal bankruptcy code.
Although inherited IRAs continue to remain protected in bankruptcy under the Arizona exemption laws, many descendants inheriting IRAs from Arizona decedents may live outside Arizona and their inherited IRAs may be available to the inheritor’s creditors and bankruptcy trustee. For most people this is an undesirable result.
There is a simple and affordable solution to prevent this from happening. Using an IRA inheritor’s trust, a specially designed trust is named the beneficiary of the IRA. If properly designed, the IRA beneficiary will retain all the “stretchout” benefits available to an individual beneficiary with the added benefit that the IRA benefits will not be subject to the claims of the inheritor’s creditors.
The IRA trust was first approved by the IRS in 2005 and is a tried and tested strategy for controlling benefits, stretching out minimum required distributions, and providing protection for creditors.