“Supreme Court Resolves IRA Protection Issue” by John M. Carnahan III
After 25 years of on-going litigation through different court systems, the United States Supreme Court, in Rousey v. Jacoway, unanimously ruled as of April 4, 2005, that Individual Retirement Accounts are exempt from creditors in bankruptcy filings. As to assets held in Qualifie Retirement Plans, the issue has been clear for many years that they are exempt from claims of creditors. Individual Retirement Plan account assets can result from several sources, including annual IRA contributions, but more prevalent today are rollovers from Qualified Retirement Plan accounts as you leave employment to either retire or move on to a new position. Many times you can have substantial amounts in your IRAs. The benefit of IRAs are that they allow you direct involvement in the investment of the assets and you may have more flexibility as to rights and timing of withdrawals.
The problem has been that the exemption from the claims of creditors in a bankruptcy filing was not as clear as it was as to Qualified Retirement Plans. If you filed for bankruptcy, there was an open issue as to whether creditors,
under the auspices of the Bankruptcy Court, could require that the IRA assets be cashed in, the bankruptcy estate pay any applicable income taxes, and that the funds then be used to pay the claims of creditors.
This is a major benefit for holders of Retirement Plan Accounts including IRAs. In addition to the tax benefits associated with these accounts, the ability to have asset protection is extremely important, and should be part of your on-going planning process.
Also note that on a regular basis, you need to review the beneficiaries of your IRA and Qualified Retirement Plan accounts. If you have charitable goals, these types of assets are usually your best choice for satisfying charitable bequests. Also, who is to receive them determines the timing of tax and how long the assets can be retained in the tax deferred creditor protection status. We recommend that you review your Designation Beneficiary Forms at least every three years. You should have copies of your Designation of Beneficiary Forms as part of your estate planning documents, just as you would have your Insurance Beneficiary Forms in your life insurance policy.
Note: As of April 20, 2005, President Bush signed the Bankruptcy Reform Act of 2005, which reaffirmed Rousey, but also established a one million dollar cap on the exempt amount of IRA accounts (but excluding rollovers). Therefore, traditional IRA accounts are treated differently than retirement plan assets including rollovers. You should consult with your professional advisor before rolling over or mixing IRA and retirement plan assets.