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Inherited IRAs likely not subject to bankruptcy protection

Posted by Cheryl Costa  April 7, 2010 01:31 AM

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You might be aware that IRAs have some creditor protection.  In fact, a 2005 bankruptcy law allows an individual to protect an IRA worth as much as $1M from creditors.  However, a recent court case seems to indicate that this bankruptcy protection does not apply to IRAs that are inherited from another person. 

The precedent-establishing Texas case involves a daughter who inherited an IRA from her mother and later filed for bankruptcy.  The daughter maintained that the inherited IRA should receive the same $1M in protection afforded to other IRAs.  However, the Texas court ruled that only the debtor's own funds qualify for the protection.  The case likely hinged on the fact that inherited IRAs remain titled in the name of the original account holder.  (When you inherit an IRA from anyone other than a spouse, you actually keep the name of the original account holder and add "for benefit of the beneficiary")

Finally, you should know that the $1M exemption put in place with the 2005 law has now increased to $1,171,650 due to the impact of inflation. 

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