By Chuck Roulet, Estate and Elder Law Attorney | Licensed in Florida and Minnesota
The question seems simple. The answer surprises almost everyone who hears it for the first time — including many people who have worked in financial services for years. An inherited IRA has no federal creditor protection. The Supreme Court said so, unanimously, in a case called Clark v. Rameker. Here is what that ruling means, how it happened, and what families can do to restore the protection a direct inherited IRA no longer has.
The Clark v. Rameker Decision — What the Supreme Court Said
In 2014, the United States Supreme Court decided Clark v. Rameker — a case involving a woman named Heidi Heffron-Clark, who had inherited a $450,000 IRA from her mother and later filed for bankruptcy. She argued the inherited IRA should be shielded from her creditors as a retirement fund under the federal bankruptcy exemption.
The Supreme Court disagreed. The decision was unanimous — nine to zero.
The Court identified three features that distinguish an inherited IRA from a personal retirement account:
- The beneficiary of an inherited IRA cannot make additional contributions to the account. Personal retirement accounts exist to build future savings — inherited IRAs do not.
- The beneficiary must take distributions from an inherited IRA regardless of their age or retirement status. A personal IRA allows the owner to leave funds untouched until required minimum distributions begin — an inherited IRA carries mandatory withdrawal rules from the start.
- The beneficiary can withdraw the entire balance of an inherited IRA at any time, for any reason, with no early withdrawal penalty. This is the opposite of the rules governing personal retirement accounts.
Based on these three features, the Court concluded that an inherited IRA is not a retirement fund in any meaningful sense — it is a pool of current, accessible wealth. As such, it is fully available to the beneficiary's creditors in federal bankruptcy proceedings.
What This Means in Practical Terms
The Clark v. Rameker ruling applies in federal bankruptcy court across all fifty states. Its implications for families planning IRA inheritances are significant and direct.
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The Core Risk for Your Family |
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An adult child who inherits your IRA directly — with no trust structure in place — has zero federal creditor protection on that inherited account. A lawsuit judgment, a divorce proceeding, or a bankruptcy filing can reach the entire balance. This is true regardless of how large the account is, how responsible your child is, or how unlikely you believe those events to be. |
Lawsuits arise from car accidents, professional liability claims, and business disputes — events that happen to ordinary, careful people. Divorce affects roughly 40 percent of marriages. Bankruptcy follows job loss, medical crises, and economic downturns that no one anticipates. The absence of creditor protection on an inherited IRA is not a theoretical risk — it is a gap that affects real families on a regular basis.
Some states offer additional creditor protection for inherited IRAs under state law. That protection varies widely, can be limited in scope, and can be lost entirely if the beneficiary moves to a state with weaker protections. Federal bankruptcy law, as interpreted in Clark v. Rameker, remains the governing standard in federal proceedings.
The Solution — A Properly Structured Spendthrift Trust
The primary planning solution for families concerned about creditor exposure is to name a properly drafted trust — rather than the child directly — as the IRA beneficiary.
A spendthrift trust contains provisions that prevent a beneficiary's creditors from reaching trust assets before they are distributed to the beneficiary. The assets are held and managed by a trustee, who distributes funds to the beneficiary according to the trust's terms. A creditor of the beneficiary cannot force the trustee to make distributions, and cannot directly access trust assets that have not yet been distributed.
When structured as a Standalone Retirement Protection Trust — a trust designed specifically to comply with the IRS rules governing inherited IRAs — this spendthrift protection applies to the entire inherited account. The protection that Clark v. Rameker eliminated for direct beneficiaries is effectively restored.
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Not Every Trust Qualifies |
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A standard revocable living trust is generally not appropriate as an IRA beneficiary without significant modification. For a trust to work correctly as an inherited IRA beneficiary, it must meet four specific IRS requirements known as the see-through trust rules. It must be valid under state law, irrevocable at the IRA owner's death, have all beneficiaries be identifiable individuals, and be properly documented with the IRA custodian by October 31 of the year following the owner's death. Drafting that meets these requirements requires an attorney with specific expertise in both trust law and IRA distribution rules. |
For a complete breakdown of how an SRPT works and when it makes sense for your family, read our full IRA estate planning guide by clicking here.
Ready to Protect Your Family's Inheritance? Call Us Today.
Whether you are a parent who wants to protect what you have built, or an adult child who wants to make sure your family's plan actually works — a conversation with an experienced estate and elder law attorney is the most important step you can take. Call us today at (941) 909-4644 for our Florida office or at (763) 420-5087 for our Minnetonka, MN office.
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Chuck Roulet is an estate and elder law planning attorney at Roulet Law Firm, P.A., with offices in Minnetonka, Minnesota and Venice, Florida. He is licensed in both states and has nearly 30 years of experience helping families protect their homes, life savings, and legacies.
This page is for informational purposes only and does not constitute legal advice. Please consult a licensed attorney about your specific situation.
