By Steven A. Koga

The United States Supreme Court recently held that creditors of the beneficiaries of IRAs, such as children, can reach Inherited IRA assets. For example, if you are the beneficiary of a $300,000 IRA from your mother and declare bankruptcy, that $300,000 will be available to your creditors along with your other assets. To avoid having those Inherited IRA assets subject to the beneficiary's creditors, the IRA owner should name a trust as the beneficiary of the IRA. The beneficiaries of the trust would be the individuals the IRA owner wants to ultimately benefit. However, the trust, if set up correctly by the IRA owner, would shield the Inherited IRA assets from the beneficiaries' creditors - while still allowing the beneficiaries to stretch distributions from the Inherited IRA over their life expectancies, thereby minimizing income tax. The IRA owner should seek professional legal advice to properly establish such a trust and designate it as the IRA beneficiary.

For more information on this landmark Supreme Court case, see this Reuters article.   In addition, you may read the full Supreme Court opinion in Clark v. Rameker, 573 U.S. __ (2014) (PDF).