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Dear beneficiary: It seemed like such a good idea at the time ...

While we tell ourselves and our kids not to wait until the last minute to do something, the U.S. Supreme Court seems to hand out its big decisions right at the end of the session. It is impossible to know if the docket is the cause, if the court spends extra time deliberating and crossing t's on some cases or if, perhaps, the court enjoys building anticipation before the justices leave for the summer.

One of the decisions handed down near the close of the 2013 session involved retirement accounts -- specifically, inherited retirement accounts. The decision got us to thinking about how important it is to consider a variety of possible scenarios when planning retirement or devising an estate plan

Just how far should you let your imagination run, though? Would you ever wonder what would happen to any money you left to your child if that child had to declare bankruptcy? We suspect it would be a stretch for most of us.

That is the basic issue in the court's decision. A woman was named the beneficiary of her mother's IRA. When her mother died, the woman and her husband opted to take annual distributions rather than one lump sum. In a few years, the woman and her husband found themselves declaring bankruptcy.

In a Chapter 7 liquidation, just about every asset the creditor has goes into the bankruptcy estate. The trustee then pays creditors from that estate. The law, however, takes the term "bankruptcy protection" quite seriously, so debtors are not picked clean of everything they own; federal and state laws allow some property to be exempt from creditors' claims.

In Pennsylvania, for example, the debtor will not lose his or her homestead or workers' compensation benefits. The state allows a debtor to choose between state and federal exemptions, but there is a good deal of overlap. Both, for example, protect retirement accounts.

The question is, though, whose retirement accounts does the exemption cover?

We'll explain in our next post.

Source: Courthouse News, "Inherited IRAs Aren't Creditor-Safe, Court Says," Barbara Leonard, June 12, 2014

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