By now, readers of this blog know that estate planning is important. Making sure that you have your assets all lined out in your will is something that you should know is important. There are, however, other assets that you have to consider when you are creating an estate plan. A recent ruling by the Supreme Court might be the reason Texas residents need to check the beneficiaries on their retirement accounts to ensure that they have the proper beneficiaries listed on them.
The U.S. Supreme Court recently found that individual retirement accounts that are inherited can be sold as part of the bankruptcy process. In most cases, IRAs are exempted from the process. The court ruled, however, that inherited IRAs aren't actually classified as retirement accounts, because the heir doesn't have to wait until he or she is at retirement age to withdraw the funds.
The question about this went before the court after a women filing for bankruptcy said that the $300,000 she inherited from her mother in an IRA shouldn't be subjected to sale as part of the process to get her creditors paid off. The court didn't see things her way. Now, the precedent is set for other judges to include inherited IRAs in the bankruptcy process.
For people who are working on estate planning, this ruling serves as a warning to only list beneficiaries on IRAs who you know will follow your wishes. An inherited IRA left to someone who is having money troubles might end up being sold to pay off creditors through the bankruptcy court. Knowing legal precedents like this one might help you to ensure that you set up your assets in your estate plan in a way that will work out for those you leave behind.
Source: USA Today Money, Supreme Court: Inherited IRAs not safe from creditors in bankruptcy John Waggoner, Jun. 13, 2014