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New ruling states some accounts not safe in consumer bankruptcy

A couple has spent years working and putting aside money in their IRA accounts for themselves and also for their children. Now, one of the spouses suffers an accident and dies. The surviving spouse would most likely take a measure of comfort knowing that the money that has been put aside will enable him or her to follow through with their retirement plans. However, in the event of a financial setback, the money in some of those accounts may no longer be protected in a consumer bankruptcy should the need arise. Washington residents may benefit from learning about a new Supreme Court decision.

In this case in which the Supreme Court was involved, one judge penned a majority ruling that stated that inherited IRAs should not be safeguarded in a bankruptcy filing. The reasoning behind the decision was that a recipient of this type of account is not bound to use the money for retirement needs. Instead, if an adult child or grandchild were to file a bankruptcy petition, creditors may access that money since it may be used by the recipient for other than the intended purpose.

There are ways to safeguard an intended inheritance. It requires careful planning, however, and there are specific documents and tools that need to be in place well before any attempt to seek bankruptcy protection, in order to avoid any accusations of fraudulent attempts to disburse assets. It needs to be clarified, though, that a person who inherits a spouse's IRA may also need to check the laws specific to their state as to whether this type of account is off-limits to creditors.

This most recent decision concerning the inheritance of an IRA reverses the trend that had been in place to protect assets that were ear-marked for retirement. Regardless, there may be Washington residents who are finding their current financial situation unsustainable, and they may decide to seek information concerning the process of filing for a consumer bankruptcy. The majority of people who would most benefit from this action may not be affected by the recent decision by the court, and instead seek an opportunity to start fresh without the load of crippling debt.

Source: Fox Business, "The Fastest Way to Lose an IRA", Gail Buckner, June 23, 2014

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