In the case of Clark v. Rameker, Trustee, Justice Sotomayer penned an unanimous opinion finding that inherited IRAs are not afforded protection under the Bankruptcy Code against creditors. The Court found that inherited IRAs are not "retirement funds" within the meaning of Section 522(b)(3)(C) of the Bankruptcy Code. There were three primary factors that lead the Court to this conclusion that inherited IRAs are not "retirement funds" within its ordinary meaning. (1) the holder of an inherited IRA may never invest additional money into the fund; (2) the holder must make withdrawals from the IRA no matter how close to retirement; and (3) the holder can withdraw the whole amount at any time.
In light of this decision, a person may wish to carefully weigh the benefit of holding assets in an inherited IRA from a tax benefit perspective and an asset protection point of view. This determination will be heavily driven by a person's risk profile.
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