How did the court in Clark v. Rameker change estate planning in Florida?

The U.S. Supreme Court recently ruled that an inherited IRA is not a “retirement account” for purposes of protection under the Bankruptcy code. This now means that inherited IRAs are available to satisfy creditor’s claims in order to pay off debt.

The court characterized an inherited IRA as money that is set aside for the original owner’s retirement rather than money set aside for a designated beneficiary’s retirement. The court reached this conclusion using three elements to differentiate an inherited IRA from a participant-owned IRA:

  1. The beneficiary of an inherited IRA cannot make additional contributions to the account, while an IRA owner can.
  2. The beneficiary of an inherited IRA must take required minimum distributions from the account regardless of how far away the beneficiary is from actually retiring, while an IRA owner can defer distributions at least until age 70 1/2.
  3. The beneficiary of an inherited IRA can withdraw all of the funds at any time and for any purpose without a penalty, while an IRA owner must generally wait until age 59 1/2 to take penalty free distributions.

The Supreme Court found that these attributes were sufficient to make inherited IRAs fall outside the definition of “retirement funds” and thus be subject to the claims of creditors. This ruling has truly shaken up the estate-planning world, as the logic presented by the supreme court justices means other retirement plan accounts could be affected such as retirement plan accounts, inherited 401(k) and 403(b) accounts.

Florida residents do have some added protection on inherited IRA’s. Florida is an “opt out state,” which means that Florida’s legislative limits its residents in bankruptcy by only allowing them to claim state law exemptions.

Prior to the Supreme Courts holding in Clark, the courts in Florida were split as to whether inherited IRAs were exempt. In 2011, the Florida legislature amended the Florida statute to address the issue and made clear that inherited IRA’s were exempt. So far the statute has not been challenged by any cases so far. However, because Florida law directly answers the issue of whether an inherited IRA can be protected from creditors, a Florida resident should be able to successfully argue it is exempt.

People who currently live in Florida should still be cautious to rely to heavily on Florida’s bankruptcy laws. Federal bankruptcy laws still require a person to live in a state for 730 days to use state bankruptcy exemptions. A Florida resident who moves out of the state will also lose Florida’s inherited IRA protection against creditors. The law regarding the protections of inherited IRAs is changing rapidly and anyone who wishes to ensure their inherited IRA’s are protected should contact an estate-planning attorney immediately.

These protections are only for those who are residents of Florida and inherit an IRA. They do not protect parents who leave IRAs to children who are not residents of Florida. As we do not know where our kids will live when we die, it is recommended that you consider using an IRA trust as the beneficiary of your IRA and not leave them directly to an individual who may lose them to creditor’s claims.

For more information on whether your retirement funds are protected from creditors, contact the Law Office of David Goldman PLLC today.

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