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Supreme Court to hear bankruptcy case involving inherited IRA

In the past, courts have handed down conflicting rulings on whether or not inherited individual retirement accounts are exempt from bankruptcy proceedings. Historically, the question of protecting inherited IRAs from creditors has not often arisen, but the question is likely to come up more often now that more baby boomers are leaving their IRAs to loved ones.

Garnerville residents will be interested to know that the U.S. Supreme Court has agreed to hear a case that could help settle the matter of how inherited IRAs are handled in bankruptcy proceedings. The high court's ruling could also affect how New York residents structure their estates and plan for the future.

In March, the Supreme Court is expected to hear arguments regarding the bankruptcy of a husband and wife whose pizza shop fell on economic hard times. In 2010, the couple declared bankruptcy, saying they owe roughly $700,000 to creditors.

However, the bankruptcy trustee decided to go after $300,000 the wife inherited from her deceased mother's IRA. The husband and wife called foul, saying that bankruptcy laws generally allow for IRAs to be exempt from creditor collections.

The trustee won with his initial claim, but a district court overturned the ruling. Then a court of appeals again found in favor of the trustee. A judge's opinion held that IRAs are no longer retirement funds when the funds are passed from a deceased owner to an heir.

The law also requires that inherited IRAs have to be distributed within five years of the death of the prior owner, and the distributions have to start within one year of the death.

New York residents with bankruptcy concerns will undoubtedly want to keep an eye on the high court's forthcoming decision.

For more on bankruptcy exemptions, please see our post from earlier this month -- "Will your inheritance be included in your Chapter 13 bankruptcy?"

Source: Reuters, "U.S. high court to chart fate of inherited IRAs in bankruptcy," Nick Brown, Nov. 26, 2013

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