The Clarks argued that the IRA was exempt because it was covered under bankruptcy laws which protect retirement funds. The trustee argued that an inherited IRA ceases to be retirement funds when it’s inherited, as the funds are not savings reserved for after the owner quits working. A lower court ruled that creditors could access the inherited IRA but that court’s ruling clashed with previous decisions in which judges had held that IRAs continued to be retirement funds after they were inherited. As a result, the U.S. Supreme Court will hear the dispute. For Baby Boomers, the case is important because it may result in more people choosing to leave IRAs via a Trust rather than directly to their children. You can read more about the case here and here .
Heidi Heffron-Clark inherited a $300,000 IRA from her late mother, Ruth Heffron. An inherited IRA must begin distribution within a year of inheritance and finish within five years to ensure that the funds cannot be passed on through generations without paying income tax. During that five-year period, Clark and her husband opened a pizza shop that failed and went into bankruptcy. Because of the bankruptcy, the Clarks owed $700,000. The trustee in charge of their bankruptcy called the IRA fair game for their creditors.