Can Creditors Reach Inherited IRA’s

I suppose the first question is whether creditors can reach IRA’s owned by the participant or the participant’s spouse when rolled over. Statutes in many states specificly exempt IRA’s from creditor attachment,levy and sale. In Michigan, the statute is very clear that outside of bankruptcy the IRA is exempt from the creditor’s reach. Another statute exempts IRA’s when the debtor takes advantage of the state exemption in a bankruptcy filing. Nonetheless there are examples of cases where IRA’s have been successfully attacked.

Inherited IRA’s are particularly vulnerable. Bankruptcy Court judges have been receptive to arguments that inherited IRA’s are not the same animal as IRA’s created by a participant and therefore should not be subject to the same protections. The distinguishing features are that the inheritors never contributed to the fund nor can they, the 10% excise tax does not apply and mandatory distributions must occur prior to attaining age 701/2. Based on these differences the courts have concluded that the state statutes were never intended to cover inherited IRA’s.

There are things that can be done. Instead of naming an individual as the beneficiary consider establishing an IRA Retirement Trust with spendthrift language and naming the Trust as the beneficiary. Not only does this add protection from general creditors, it restricts access to the principal by the beneficiary and is rather helpfu. in protecting against dissipation of the IRA’ assets by younger or immature beneficiairies.