There was a time when pensions were the norm. Individuals went to work for companies with the hope of being part of a great pension plan that would take care of them in retirement.

These days, pensions are largely nonexistent. They’ve been replaced by individual retirement accounts of various kinds and the government has passed rules and regulations to encourage us all to save as much as we can through IRAs as possible. But, where money is involved, legal conflicts often surface and it can wind up being left to the courts to figure out how things should play out.

For example, take the case that got heard before the Supreme Court late last month. It features the question whether an inherited IRA worth about $300,000 should be protected from Chapter 7 bankruptcy proceedings and distributed as part of the payout to creditors.

On one hand, the bankruptcy code establishes that retirement funds are supposed to be shielded in bankruptcy. But some state judges have disagreed about whether the shield should be extended if the IRA money is willed to an heir.

The case in question is out of a state other than Arkansas, but because it’s before the Supreme Court, it carries implications for our state, too.

The details of the case are these. A woman reportedly inherited an IRA with about $300,000 in it from her mother in 2001. In 2010, the woman and her husband closed their struggling small business and filed for Chapter 7 bankruptcy. The couple says the money should be untouchable by the bankruptcy trustee, but the trustee says the retirement money lost its shielding once it was bequeathed to the woman.

A decision from the high court isn’t expected until sometime in June. Meanwhile, professional advisers face a quandary about what strategies to employ to best shield inherited IRA funds from bankruptcy and tax liabilities. Different legal structures carry different potential tax obligations.

According one tax expert, however the Supreme Court decision goes, it “really will affect the financial security of those who inherit IRAs.” 

Source: The Wall Street Journal, “Shielding Inherited IRAs From Creditors,” Arden Dale, April 2, 2014