For Professional Advisors, Clients, Business Owners
Asset protection is an increasing focus in our practice. In its March 4,
2011 Tax Letter, Kiplinger gave the impression that inherited IRAs are
exempt from creditors and in bankruptcy, citing an Arizona case. For now,
that’s not the case in Illinois. Allow me to explain:
In the case cited by Kiplinger, Kay Theim and her husband filed for bankruptcy.
While the bankruptcy was pending, Kay’s mother died, leaving her
$10,032.57 as beneficiary of an IRA. Mrs. Theim wanted to keep the IRA.
Who wouldn’t? So, she amended her bankruptcy petition, seeking to
have the inherited IRA exempted from her bankruptcy estate. The bankruptcy
trustee objected and the litigation progressed. In a 21 page opinion,
the United States Bankruptcy Court in Arizona held that the IRA was exempt
and that Mrs. Theim could keep the IRA money.
What would happen if Mrs. Theim lived in Illinois? Illinois has a statute
that states that all IRAs and qualified retirement plans (401(k) plans,
profit sharing plans, defined benefit plans) are exempt from attachment
by creditors and are outside an individual’s bankruptcy estate.
Meaning… One would hope that the beneficiary of an IRA would be
awarded the same protections that an IRA accountholder would have.
Unfortunately, in Illinois, Mrs. Theim might be out of luck. A 2006 bankruptcy case,
In re Taylor is the only case applying Illinois law. The court summarily decided that
a contributory IRA or rollover IRA and an inherited IRA were different
because one cannot roll over an inherited IRA. Thus, an inherited IRA
is not the same as a contributory IRA and is not protected. This ruling
is controversial. I’m certain it will be challenged in cases soon to come.
In the meantime, it will be important to consider asset protection planning
for non-spouse inherited IRAs in Illinois. This requires coordinated planning
among the client’s professional advisors including his or her attorney,
investment and/or insurance advisor and accountant.
It’s 10:30pm as I write this. Do you know if your inherited IRA is
protected from creditor attack?
Do you think that inherited IRAs should be exempt from creditors?
(Case and statute citations are available by contacting me).