• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Unsworth LaPlante, PLLC

Vermont Estate Planning Attorneys

Vermont: (802) 879-7133

Attend A Free Workshop
  • Home
  • Our Firm
    • About Our Firm
    • Meet Our Team
    • What to Expect When Working with Us
  • Services
    • Estate Planning
    • Incapacity Planning
    • IRA & Retirement Planning
    • Legacy Planning
    • LGBTQ Estate Planning
    • Medicaid Planning & Elder Law
    • Pet Planning
    • Special Needs Planning
    • Trust Administration
    • Young Families Planning
  • Resources
    • Articles
    • Elder Law Reports
    • Elder Law Resources
      • Burlington
      • Montpelier
      • Rutland
      • St. Johnsbury
      • White River Junction
    • Estate And Gift Tax Figures
    • Free Estate Planning Worksheet
    • Frequently Asked Questions
      • Elder Law
        • In-Home Elder Care
        • Medicaid
        • Planning for Long-Term Care
      • Estate Planning
        • Business Succession Planning
        • Estate and Gift Tax
        • Estate Planning for Blended Families
        • Estate Planning for Parents
        • FAQs for Families Without an Estate Plan
        • LGBTQ Estate Planning
        • Taxes on Inheritances in Vermont
      • Incapacity Planning
      • IRA & Retirement Planning
      • Gift, Estate, and Inheritance Taxes
      • Legacy Wealth Planning
      • Philanthropy and Estate Planning
      • Pet Planning
      • Revocable Living Trust
      • Special Needs Planning
      • Trust Administration
      • Trusts
      • Wills
    • Is Your Estate Plan Outdated?
    • Medicaid Resources
      • Medicaid Analysis Worksheet
      • Medicaid Guide
      • Vermont Medicaid
    • Newsletters
    • Presentations
    • Reports
      • Advanced Estate Planning
      • Basic Estate Planning
      • Estate Planning for Niches
    • SECURE Act
    • Top Estate Planning Techniques
  • Webinars/Seminars
  • Reviews
    • Our Reviews
    • Review Us
  • BLOG
  • Contact
Home » What Your IRA Beneficiaries Need to Know

What Your IRA Beneficiaries Need to Know

March 16, 2015 by Ellen LaPlante

capture-20150302-020656Last summer, the Supreme Court ruled that funds held in an “inherited IRA” are not retirement funds within the meaning of Section 522(b)(3)(C) of the Bankruptcy Code. This means, the accounts are subject to creditor claims in a bankruptcy.

The Supreme Court was asked to rule inherited IRAs remain retirement accounts once they’re inherited by the beneficiaries. The argument was simple, the suit explained. An individual IRA that’s passed down should maintain its characteristics and remain protected from creditors. The Supreme Justices disagreed – and they were in unity. The Court decided a beneficiary of an inherited IRA may never invest in the account and because withdrawals are required from these accounts, it lost the traditional characteristics. Finally, a holder of an inherited IRA may withdraw the entire balance of the account at any time, and for any purpose, without penalty, while a withdrawal from a traditional or Roth IRA prior to age 59-1/2 triggers a 10 percent penalty, unless an exception applies. This changed everything and affects not only Americans, but every business sector too – especially the financial services sector.

So what justification could the SCOTUS have? For starters, beneficiaries don’t have the benefit of adding money to the inherited IRA. Further, they’re required to begin taking distributions the year following their inheritance. Makes no difference how old they are. They also have the option of taking distributions after they reach 59 and one half years with no penalties.

The Heart of the Lawsuit

The lawsuit was filed after a woman filed for Chapter 7 bankruptcy protection, but also wished to ensure the inherited IRA was exempt from bankruptcy laws. The account was worth $300,000 and she argued it was a retirement account, albeit inherited, and should be protected.

The courts disagreed and it made its way to the Supreme Court. Last summer, the Court ruled. Since then, many have begun rethinking ways to protect their loved ones who might be a beneficiary at some point to their IRAs. For those who feel the beneficiary could lose it in bankruptcy or via lawsuits filed by creditors, it makes sense that they begin to rethink their options.

IRA Beneficiaries Confusion

Even though the SCOTUS ruling applies specifically to inherited IRAs, it doesn’t address whether or not it applies only to those beneficiaries who are non-spouses, such as a child or whether it applies across the board to include surviving spouses. There are those who are confident the ruling won’t apply to surviving spouses and even if it does, those spouses will maintain the option of simply rolling the IRA into their own.

It could be problematic in other ways, too. Let’s say your 35 year old son in law is one of your IRA beneficiaries. He inherits your IRA worth $500,000 and then is sued when his construction company goes under. Not only will the $500,000 be fair game for creditors, but he will then also have to pay the taxes on that money. Remember, it’s no longer a retirement account, so it’s open to that kind of scrutiny. Needless to say, in some instances, inherited beneficiaries will not only lose their inheritances, but they may also be subject to paying taxes when they’re already in a vulnerable financial situation.

It’s a challenging predicament with no easy answers. To learn more about protecting your assets and your beneficiaries, contact our offices today.

  • Author
  • Recent Posts
Ellen LaPlante
Ellen LaPlante
Ellen LaPlante is an attorney whose mission is to provide clients with guidance in Estate Planning, Elder Law, and Medicaid Preparation. She is barred in Vermont and New York. Ellen helps clients put together unique estate plans, including assistance with Trusts, Wills, Powers of Attorney, and Advance Directives. She also works with clients on Medicaid Planning and qualifying for Medicaid assistance.
Ellen LaPlante
Latest posts by Ellen LaPlante (see all)
  • How to Apply for Senior Medicaid in Vermont - December 11, 2022
  • Planning for the “Silver Tsunami” - November 1, 2022
  • Discharge of Indebtedness Income and Student Loan Forgiveness - October 27, 2022

Filed Under: Retirement Planning

Other Articles You May Find Useful

Essex Junction elder law attorney
Best Countries for Retirement
Social Security Retirement Benefits – How to Decide When to Retire
Essex Junction estate planning attorneys
How Does Vermont Rank for Retirees?
Essex Junction estate planning attorneys
Practical Retirement Planning Tips
retirement planning
Weigh the Impact of Taxes During Retirement
Social Security reform
Biden Would Like to Reform Social Security

Primary Sidebar

Elder Law and Medicaid Planning Attorneys

Unsworth LaPlante, PLC

DOWNLOAD OUR FREE ESTATE PLANNING WORKSHEET

There's a lot that goes into setting up a comprehensive estate plan, but with our FREE worksheet, you'll be one step closer to getting yourself and your family on the path to a secure and happy future.

  • This field is for validation purposes and should be left unchanged.

Follow Us

  • Facebook
  • Instagram
  • LinkedIn
  • Twitter
  • YouTube

Blog Subscription

Sign up to Unsworth LaPlante's estate planning blog to receive all the latest news and updates.

  • This field is for validation purposes and should be left unchanged.

Essex Junction, VT

26 Railroad Ave
Essex Junction, VT 05452
United States (US)
Phone: (802) 879-7133
Fax: (802) 879-0408

Map

unsworth_sidbr_map

Office Hours

Monday8:00 AM - 4:00 PM
Tuesday8:00 AM - 4:00 PM
Wednesday8:00 AM - 4:00 PM
Thursday8:00 AM - 4:00 PM

Footer

footer-logo
  • Facebook
  • Instagram
  • LinkedIn
  • Twitter
  • YouTube

The information on this Vermont Attorneys & Lawyers / Law Firm website is for general information purposes only. Nothing on this or associated pages, documents, comments, answers, emails, or other communications should be taken as legal advice for any individual case or situation. This information on this website is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship.

American Academy of Estate Planning Attorneys, Inc. Privacy Policy | Contact Us | Disclaimer | Site Map | Powered by American Academy of Estate Planning Attorneys

© 2023 American Academy of Estate Planning Attorneys, Inc.