In the fall of 2014, my colleague Betsy wrote an informative blog regarding a recent U.S. Supreme Court decision that held that under federal law, an IRA that is inherited by an individual (i.e. the beneficiary) is not protected in bankruptcy.
Betsy also alluded to possible protection for IRAs under state law notwithstanding the Supreme Court’s holding. This is because federal bankruptcy laws allow certain state law exemptions to apply rather than the federal bankruptcy exemptions.
The State of Florida is in fact one of those states that provides exemption from the reach of creditors for IRAs and other qualified retirement plans. In fact, Florida law expressly exempts inherited IRAs and other inherited qualified retirement plans from creditors. Of course, this protection for retirement benefits is premised on the beneficiary being a resident of Florida. Accordingly, the above-mentioned U.S. Supreme Court decision will generally not apply to Floridians who file for bankruptcy. Whether you are considered a resident of Florida depends on many factors outside the scope of this article but note that for bankruptcy purposes, you need to have been domiciled in Florida for 730 days (2 years) prior to filing of a bankruptcy petition in order to get the benefit of Florida’s creditor exemptions.
This should provide some piece of mind for Florida resident retirement plan owners who have named their spouse as beneficiary, presuming the spouse is also a resident of Florida. For retirement plan owners wishing to name a non-Florida resident child as beneficiary with bankruptcy or creditors concerns for that child, the owner may want to consider Betsy’s recommendation to create and name a trust for the benefit of the child as the IRA beneficiary.
Unfortunately, Florida law is unsettled regarding whether distributions from retirement plans also carry the same creditor exempt status as the retirement plan itself. This may be yet another reason to consider creating and naming a trust as the IRA beneficiary for the benefit of the intended child or spouse.