Colorado Probate Blog - Wade Ash Woods Hill & Farley, P.C.

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Inherited IRA Not Protected From Bankruptcy

In Clark v. Rameker, 113 AFTR 2d 2014-889 (June 12, 2014), the U.S. Supreme Court unanimously ruled that inherited IRAs do not qualify for the bankruptcy exemption that applies to a debtor's own retirement accounts. Some states have their own exemptions from creditor claims that may include inherited IRAs, but the debtors in this state does not. The Supreme Court's decision was based solely on the federal exemptions in the bankruptcy code. In C.R.S. ยง13-54-102, Colorado has a list of state exemptions for protection from creditor claims. That list includes "property, including funds, held in or payable from any pension or retirement plan or deferred compensation plan..., any individual retirement account, as defined in 26 U.S.C. Sec. 408, any Roth individual retirement account as defined in 26 U.S.C. Sec. 408A..." In 2010, Laurie Hunter proposed in the Statutory Revisions Committee of the Trust & Estate Section of the Colorado Bar Association that Colorado's list of exemptions be clarified to specifically include a reference to inherited IRAs, as a result of conflicting decisions in federal Circuit Courts. Colorado had earlier amended this statute to include the specific reference to Roth IRAs quoted above. That proposal was not adopted by SRC, although a number of members thought our statute was broad enough to include inherited IRAs, which are defined in 26 U.S.C. Sec. 408(d)(3)(C) (a part of Section 408 mentioned with respect to IRAs). However, if creditor protection is important for beneficiaries, it may be preferable to have IRAs payable to trusts created for the benefit of those beneficiaries instead of payable outright to individuals who then "roll them over" into inherited IRAs. If a surviving spouse rolls over an IRA to his or her own IRA, then it should be protected as a part of that spouse's own retirement account. Other individual beneficiaries do not have that option.

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