One advantage of holding money in an individual retirement account (IRA) is that a creditor cannot garnish or levy an IRA to collect a judgment. When the account owner dies, the account passes on to her designated beneficiary. The account owner's creditors cannot levy the account for the deceased owner's debts, but state law and the beneficiary's relationship to the deceased determine whether a creditor can get to an inherited IRA to pay the debts of the beneficiary.
Debts of the Deceased
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. 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 individual retirement account 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. State law determines whether you can protect an inherited IRA from creditors. At the time of publication, at least nine states specifically shield inherited IRAs from collection action. In some states, such as Florida, courts have held that creditors can levy an inherited IRA for the beneficiary's debt. In other states, such as New York, courts have not yet decided the issue.
Trust as Beneficiary
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.
- Forbes.com; You Inherited an IRA. Can Creditors Grab It?; Ashlea Ebeling; March 2010
- Family Finance; Can My Creditors Seize an IRA I Inherited from my Mother?; Lynn Brenner; April 2009
- RetirementIncome.net: IRA and Related Retirement Plans;
- PeoriaMagazines.com; Protecting Your Real Estate from Creditors; Joseph B. VanFleet, et al.; May 2010