IRAs are protected from Bankruptcy at the Federal level. However, inherited IRA’s through a unanimous supreme court ruling are not protected. The U.S. Supreme court made room for states to protect these accounts if they wish. The ruling simply states that there is no protection provided at the Federal level.
California is not looking like a great state when it comes to protecting these accounts, even traditional IRAs can be seized by creditors.
U.S. Supreme court rules on Inherited IRA Creditor Protection
The question that begs to be asked here is how can these assets be protected? Keep in mind if the source of the money in the IRA is a 401k – you are protected by ERISA. I would encourage you to document the trail of the money. Don’t think ERISA will protect the non-spouse beneficiary though.
There are a few ideas of how to protect the money. You certainly need to be proactive. One such idea is using IRA trusts. These are specially designed trusts that will help protect the IRA from massive tax and creditor issues. Know that these IRA trusts are easily broken – by being poorly constructed. I have seen IRA trusts with special binders, service marks and huge price tags that won’t stand up in court. That is to say the legal team messed up on the language and they will fail if a creditor challenges them.
We have specially constructed checklists to help ensure these issues don’t get overlooked. Consider calling set an appointment to meet with me. Our first appointment is all about getting to know each other – and there is never a charge for the first meeting. Our office number is 408-459-8383.
NOTE: this is not to be construed as legal advise. Always consult an attorney who has deep knowledge in this area. It is a unique area and your average attorney won’t have the proper training.