As the baby boomers age and pass on, an interesting issue has arisen in some bankruptcy cases: can you claim an exemption in an IRA or other protected retirement account which you inherit? Bankruptcy laws allow you to exempt an IRA in your name up to $1.25 million dollars. This protects these accounts from your creditors if you need the protection that bankruptcy offers.
Bankruptcy law is not as clear on whether you can exempt an IRA account which you inherit, and in general, any property you inherit in the six months after you file bankruptcy may have to be sold or turned over to pay creditors. Most courts that have confronted this issue have ruled that the IRA keeps its exempt status even after it is inherited. But the Seventh Circuit Court of Appeals recently decided that an IRA kept its exempt status if it was inherited by a spouse, not by any other relative. It’s not clear whether other courts will follow this reasoning, but it adds another issue to the planning which should occur before anyone files a bankruptcy.
Are you the beneficiary of an IRA? Would you even know if you were? If your financial situation has you considering bankruptcy as an option, ask your parents or other relatives whether or not you are a beneficiary of their retirement accounts so you can take that fact into account as you make the best possible decision on what to do.