A recent Arizona bankruptcy court ruling indicates that now there might be even more reason to stretch an IRA. There have always been tax advantages to stretching an Inherited IRA – when a beneficiary takes only the minimum required distribution from an IRA each year, the impact of income taxes is minimized, and the remaining IRA assets are allowed maximum growth. However, while it was clear that IRA funds were shielded from the contributor’s creditors, it was unclear that such protection was afforded to a beneficiary who inherited an IRA. The Arizona ruling indicates that, now, Inherited IRA’s might be eligible for creditor protection, too.
Here’s what happened in the Arizona case, In re Thiem:
- Back in 2005, Kay Thiem and her sister inherited their mother’s IRA.
- The mother’s IRA funds were transferred into an Inherited IRA for Kay. Kay then used her own funds to pay half the value of the IRA to her sister.
- Kay took only the required distributions from her Inherited IRA.
- In 2010, Kay and her husband filed a Chapter 7 bankruptcy petition and claimed an exemption on the Inherited IRA.
- The bankruptcy trustee objected, but the judge ultimately decided that the IRA was exempt from the claims of the couple’s creditors under both the applicable Arizona statute and the federal bankruptcy code.
The Arizona court’s ruling does not represent the final answer on this issue, however. Bankruptcy cases from the Middle District of Alabama, the Southern District of California, and the Eastern District of Texas have yielded the opposite outcome. We’ll have to wait for guidance from the United States Courts of Appeals and perhaps even the United States Supreme Court for a definitive ruling on the matter as to the federal aspects. Look for rulings in your state regarding resolution of this matter under your state’s law.
So, stretching an IRA may be an even better idea than we thought. We already knew that it can provide income tax benefits and creditor protection for the contributor and income tax benefits for the inheritor. Now, we’ve learned that the IRA may provide creditor protection for the inheritor, as well.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Rd Ste 240
San Diego, CA 92124