One of the many reasons that IRAs appeal to investors is the asset protection they provide. IRAs are typically included within the protections given to retirement plan funds. Bankruptcy law provides exemptions for retirement funds. Creditors are prohibited from attaching retirement fund accounts.
In a recent case, the Seventh Circuit held that once an IRA becomes an inherited IRA, such IRA is not subject to the same protection.
This ruling by the Seventh Circuit creates a circuit split. The Eighth Circuit (of which Nebraska is part) and the Fifth Circuit have previously held that inherited IRAs are exempt in bankruptcy. IRA owners should review their estate plans and consider whether the addition of a conduit trust as a beneficiary is a desirable way of adding more protection to the arrangement.
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