If your heir goes through bankruptcy, they can end up losing many of the assets that were handed down to them. Not every asset gets a pass during the bankruptcy process, and that includes an inherited IRA. If you plan to pass on these types of funds, you should talk to a Rockland County estate planning attorney about how you can protect it.

What Happens If the Inherited IRA Goes to My Spouse?

There is one situation where an inherited IRA keeps its protections, and that’s when it is passed on to your spouse. If your spouse gets your IRA and goes through bankruptcy, the funds inside that IRA can be exempt and creditors will not go after it. It’s treated like their own retirement funds, which are usually protected during bankruptcy proceedings.

When Can Creditors Take From an Inherited IRA?

So when can creditors take money from an inherited IRA? If you choose anyone but your spouse as a beneficiary, the money in that retirement account is not protected. If your child, niece, nephew, grandchild, or whoever else gets that inherited IRA files for bankruptcy, creditors can take that money.

How Can I Protect an Inherited IRA?

Obviously, you didn’t set up a will and pass down your retirement funds to loved ones just so that some creditors can take it if your beneficiary makes mistakes or runs into some hard times. So what can you do to protect that inherited IRA for your beneficiary? One smart option is setting up a trust.

Instead of having your family member or friend inherit the IRA, the trust gets the account and the funds inside of it. Then the intended beneficiary can be named a beneficiary of the trust. You can distribute funds to them that way.

The trust and its assets are protected from creditors. This setup also protects the inherited IRA from divorces and lawsuits. You can also set rules about the trust and how money is distributed. This can be especially helpful if your intended beneficiary is not the best with money.

A trust also enables you to make plans for if the funds in the inherited IRA are not depleted in your beneficiary’s lifetime. If you pass down retirement funds to your son and he doesn’t use all of them before he passes away, you can make sure that the trust continues to exist and provide funds for your grandchildren.

Talk to Our Estate Planning Lawyers

When you are ready to divide up your assets and make plans to provide for your loved ones after you are gone, don’t try and do it all on your own. Contact the Lauterbach Law Firm and talk to an experienced estate planning attorney. We can help you establish trusts or make other smart moves that can protect your assets from creditors and anyone else.