Are inherited retirement accounts protected in bankruptcy?
When a person in Atlanta files for personal bankruptcy, his or her retirement accounts are protected from being used to pay off debts in most cases. This rule was established to ensure that people who go through bankruptcy are not left worse off than before they filed.
What happens, though, if you inherit a retirement account from a friend or family member? Is that account also protected in bankruptcy? The answer to that question is not clear right now, but it should become clear in the next few months.
This subject is at the heart of a case that the Supreme Court recently agreed to hear. A woman inherited nearly $300,000 in an individual retirement account from her mother. After the woman filed for Chapter 7 bankruptcy, however, the bankruptcy trustee planned to use the money in the inherited account to pay back creditors. Citing the rule that retirement accounts are protected in bankruptcy, the woman objected.
The trustee, however, argued that an inherited retirement account has different purposes than one that a person builds up over time. If a retirement account is bequeathed to a nonspouse, that individual must start spending the money by a certain time and cannot deposit money into the account.
The Supreme Court has heard arguments from both sides and will make a decision this summer. It will be interesting to see what the Supreme Court justices decide since their ruling will have a broad impact on bankruptcy cases across the country, including those in Georgia.
Source: The Wall Street Journal, “U.S. Supreme Court Hears Bankruptcy Fight Over Inherited IRA Money,” Katy Stech, March 25, 2014