Can Creditors Get an IRA When the IRA Owner Dies?

You could be wondering, “What happens to my IRA when I die?” Alternatively, you may be asking yourself, “Do IRA beneficiaries go through probate?”

Well, those are valid questions for anyone who is in the process of estate planning. But the answer to what happens to assets left behind when an inherited IRA owner dies, depends on the situation.

Generally, holding money in an individual retirement account (IRA) is advantageous because the creditor cannot garnish or levy an IRA to collect a judgment. And when the account owner dies, the account passes on to her designated beneficiary.

However, there is an exception, which is when you owe the IRS back taxes. According to the IRS, in such a case, it will use any means at their disposal to get their money, including seizing your retirement account investments, Social Security benefits, or pension.

It is worth noting that in most cases, the IRA owner's creditors cannot levy the account for the deceased owner's debts. But the beneficiary's relationship to the deceased determines whether a creditor can get to an inherited IRA to pay the debts of the beneficiary. The American College of Trust and Estate Counsel lists all the state rules in that regard.

Creditors cannot garnish or levy an IRA that belonged to the deceased to pay the debts of the deceased. The law protects an IRA from creditors in life, and it also protects the IRA from creditors in death. And while other assets and debts of the deceased are subject to probate, where a judge may order the deceased's assets to be sold to pay debts, an IRA passes directly to the named beneficiary on the account without going through probate.

If the deceased owner of the IRA was the beneficiary's spouse, the account is safe from seizure by the surviving spouse's creditors. Even if the surviving spouse declares bankruptcy, creditors cannot touch the IRA that the surviving spouse inherited.

A spouse who receives an IRA from a deceased spouse can rollover the funds into an IRA in the surviving spouse's name, protect the funds from creditors, and defer paying taxes on the funds until the surviving spouse starts making withdrawals from the account.

Beneficiaries who inherit an IRA from a parent, sibling, relative or friend may not be able to protect the account from creditors, especially if the recipient beneficiary declares bankruptcy. That is based on the 2014 Clark v. Rameker Supreme Court ruling, which stated that an inherited IRA currently owned by a non-spouse beneficiary, will no longer be considered a retirement account for bankruptcy purposes, thus, rendering it vulnerable to creditor claims.

However, state law determines whether you can protect an inherited IRA from creditors. For example, Florida and Maryland specifically shield inherited IRAs from collection action by extending legal protection to IRA beneficiaries, while in Nevada, the legal protection covers up to ​$1 million​ worth of assets within an inherited IRA.

On the other hand, states like Illinois consider non-spouse inherited IRAs similar to checking accounts, thus, unprotected from creditor claims. Similar rules apply in New York, where an inherited IRA is unlikely to be exempt.

If an IRA owner names her estate as her beneficiary, the account will go through probate, where a judge will probably order that the IRA be liquidated to pay the debts of the deceased and be distributed among the heirs of the deceased.

However, if an IRA owner names an irrevocable trust as her beneficiary, creditors cannot garnish or levy the trust assets. As a beneficiary takes distributions from the trust, those distributions become the beneficiary's property, and creditors can seize the distributions to pay debts.