In a unanimous decision in June 2014, the Supreme Court ruled that an Inherited IRA is no longer a retirement account. Noting that a beneficiary can withdraw any amount from that account without penalty whenever he/she wishes, the Court ruled that the money in that account is not protected from creditors under federal bankruptcy law. As a result, financial advisors and families are taking steps to shield IRA assets for children and other beneficiaries in case those heirs ever find themselves in bankruptcy proceedings. However, there are different methods to protect such assets, but almost all of them involve trusts as the beneficiary of the IRA rather than an individual.
The issue is a complex one and therefore the main challenge is identifying the right kind of trust which may depend on how many beneficiaries, tax holes and assets protection holes are involved.
Source: Wall Street Journal (October 13, 2014)