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Supreme Court decision could affect IRA inheritances

We've written before about coordinating trusts and wills to get the most out of an estate plan. A will can go long way in clarifying how you want your assets distributed, and a trust can be set up to protect assets, provide you with a stream of income, and shield loved ones from a heavy estate tax.

Individual retirement accounts constitute another aspect of many New Jersey estate plans, and as more baby boomers grow older, more loved ones are likely to inherit IRAs. With that in mind, let's consider a case that is scheduled for U.S. Supreme Court hearings in March. The case may be especially relevant for IRA owners who have heirs who might run into financial trouble down the road.

The high court is expected to hear a bankruptcy case involving the inheritance of an IRA. A woman and her husband are owners of a pizza restaurant in Wisconsin. The pizza shop didn't do very well financially, and the husband and wife ended up filing for bankruptcy.

In their filing, the couple listed $700,000 in debts. However, the woman was the heir to $300,000 from her late mother's IRA.

After hearing of the inheritance, the bankruptcy trustee moved to open up the IRA funds to creditors, but the husband and wife sought to have the funds protected. After all, there is precedence for exempting IRAs from bankruptcy collections.

The bankruptcy trustee won a couple of rulings, and the husband and wife won a ruling. Now the case has made it to the Supreme Court, which is poised to make a major decision regarding how bankruptcy treats inherited IRAs.

An appeals court has already found that the woman's inherited IRA funds aren't really retirement funds anymore -- not since the woman's mother passed away.

An attorney representing the husband and wife pointed out that a ruling that makes inherited IRAs available to creditors could result in more people protecting their retirement funds in a trust, instead of directly passing those funds down to heirs.

New Jersey residents with IRAs will definitely want to watch for the outcome of the case this coming spring.

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

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