Normally, if you go through the bankruptcy process, some of your assets are exempt. Creditors cannot go after retirement accounts, for example. Confusingly enough, this does not mean that inherited IRAs or retirement funds are protected though. Depending on how an IRA is passed down or who the beneficiaries are, creditors could find a way to take these assets during a bankruptcy filing. If you really want to protect them, you may want to speak to a Woodland Hills, California estate planning attorney.
Can Funds From Inherited IRAs Be Taken in Bankruptcy?
Unfortunately, the answer is yes. If someone has an inherited IRA and they file for bankruptcy, it may be possible for their creditors to come after the funds in that account. This is despite a usual exemption for retirement funds that bankruptcy filers can usually take advantage of. This exemption only applies to your own retirement funds.
There is one situation where an inherited IRA could be protected. That’s when you leave your retirement account to your spouse. Leave it to one of your children or any other beneficiary and it’s fair game for creditors.
Can a Trust Protect the Funds in Inherited IRAs?
The good news is that there are ways to protect funds from inherited IRAs, even when the beneficiary of that account runs into financial trouble. Instead of naming a person as the inheritor of your account, you can set up a trust and make that trust your beneficiary. Then that trust can be set up to distribute the funds.
This setup protects an IRA from creditors in case your intended beneficiary files for bankruptcy. It can also protect the funds in case your loved one goes through a divorce or gets sued. We think that setting up a trust is definitely worthwhile in situations like these, and one of our experienced lawyers can guide you through the process.
When Should I Consider Setting Up a Trust?
Not everyone sets up trusts for their inherited IRAs and it is ultimately up to you if you want to set up a trust. We suggest it in most situations though, and it’s especially wise to have one if your beneficiary is not the best with finances. You can pick a more responsible person to be a trustee and they can help ensure that your money isn’t squandered. It can also be a good idea to make a trust if you want or expect these inherited funds to be passed on for more than one generation.
Consult With an Experienced Estate Lawyer
When you are splitting up assets and picking beneficiaries, make sure that you are doing everything that you can to ensure that your loved ones will actually be the ones receiving their inheritances. Contact the Law Offices of Yacoba Ann Feldman to schedule a consultation with an experienced estate planning attorney who can help you protect your assets. We are ready to assist you and your family.
