In light of the recent U.S. Supreme Court case of Clark v. Rameker, creditors will begin to zero in on Inherited IRAs.

What is an Inherited IRA? These are IRAs inherited by non-spouse beneficiaries. Typically, spouses rollover IRAs and become the IRA owner if they are designated as the beneficiary. But non-spouse beneficiaries do not have that option. Characteristics of an Inherited IRA are as follows:

  1. The beneficiary cannot make contributions to such IRA;
  2. The beneficiary must take annual distributions, at least equal to the Minimum Required Distribution (MRD);
  3. The Beneficiary can withdraw the entire fund at anytime without a tax penalty.

In the Clark v. Rameker case, the mother left her daughter a $450,000.00 IRA on her death. The daughter took MRD for nine years then filed for Chapter 7 bankruptcy when the IRA was valued at $300,000.00. The daughter claimed the IRA as an exempt retirement fund which was protected from creditors. Previously, the Fifth Circuit had ruled that an Inherited IRA was protected, but the Seventh Circuit created a conflict with the Fifth Circuit by ruling that the Inherited IRA was not protected. Based on this conflict, the U.S. Supreme Court heard the case and upheld the Seventh Circuit ruling.


Simply stated, your IRA will be a target for creditors on your death if it is left to a non-spouse beneficiary since the IRA will be classified as an Inherited IRA.


Something that I have done for years with clients is prepare an IRA Designated Beneficiary Trust (DBT).

The IRA DBT is a Trust that is arranged specifically for IRAs/Retirement plans. The key to this arrangement is that the Trust, rather than an individual, is designated as the IRA beneficiary. For this reason, the Inherited IRA would be protected because it is payable to a Trust. The Trust beneficiaries would ultimately receive the IRA funds depending on the terms of the Trust. If the individuals or Trust Beneficiaries were threatened by creditors or were requited to file for bankruptcy, the Inherited IRA, payable to the Trust, would be protected.

Example #1: Samantha’s parents set up IRAs naming her, individually, as the IRA beneficiary. On each parents’ death, Samantha becomes the beneficiary of an Inherited IRA. Samantha and her husband have creditor problems because of his businesses and ultimately file for bankruptcy. Based on the ruling in the Clark case, her Inherited IRA will not be protected from creditors.

Example #2: Becca’s mother has a 401K and an IRA which she desires for Becca’s financial security. A financial planner informed the mother about the Clark case, so she sought out an attorney who was experienced in IRA DBTs. An IRA/Retirement Fund DBT was arranged, designating the Trust as the primary beneficiary of the IRA and 401K. Becca was the sole DBT beneficiary.
After Becca’s mother passed away, the Inherited IRA funds were payable to the Trust and then distributed to Becca by the Trustee on terms provided in the Trust. Later, when Becca incurred creditor problems as a result of a bad real estate investment, her Inherited IRAs remained protected by the Trust and out of reach of her creditors.


If you have an IRA or Retirement plan, which is to ultimately benefit your children, grandchildren, or other beneficiaries, planning is required. You individually, or you and your spouse together, should seriously consider the asset protection of an IRA/Retirement Fund Designated Beneficiary Trust. In light of the Clark v. Rameker decision by the U.S. Supreme Court, this is an essential planning technique in the estate.

Jack E. Stephens, J.D., LL.M. has implemented IRAs into his Trusts and Estate Planning for years. He wrote a book, Avoiding Tax Traps In You IRA, which was endorsed by Kiplingers and included a segment on the use of IRA Trusts for clients.