Inherited IRAs are generally not protected from creditors when a non-spouse inherits them. In Clark v. Rameker (2014), the Supreme Court held unanimously that an inherited IRA is not a “retirement fund” under the Bankruptcy Code, so a bankruptcy trustee can reach the full balance to pay creditors.1Justia U.S. Supreme Court Center. Clark v. Rameker, 573 U.S. 122 (2014) Outside bankruptcy, whether creditors can reach the account depends on your state’s exemption laws, and most states offer little or no specific protection. A surviving spouse has a way out through a rollover, inherited employer plans follow a more protective rule under ERISA, and a properly drafted trust can restore much of what the Supreme Court took away.
What the Supreme Court Decided in Clark v. Rameker
The petitioners in Clark tried to shield roughly $300,000 in an inherited IRA from their Chapter 7 bankruptcy estate under 11 U.S.C. 522(b)(3)(C), the exemption for “retirement funds” held in tax-exempt accounts.2Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions The Court said no, pointing to three features that make an inherited IRA behave nothing like retirement savings:
- The beneficiary cannot add new contributions to the account.
- The beneficiary must take distributions regardless of age or retirement status.
- The 10% early-withdrawal penalty that normally deters tapping retirement money before age 59½ does not apply.
Those features told the Court the money is freely available for current spending, not set aside for retirement. The practical result: if a non-spouse beneficiary files bankruptcy, the trustee can reach the entire inherited IRA balance.1Justia U.S. Supreme Court Center. Clark v. Rameker, 573 U.S. 122 (2014)
The Spousal Rollover Restores Protection
A surviving spouse has an option no other beneficiary gets. The spouse can roll the inherited IRA into their own IRA, and once that rollover is complete, the account is no longer “inherited.”3Internal Revenue Service. Retirement Topics – Beneficiary It becomes the spouse’s personal retirement account, and the full federal bankruptcy exemption for owned IRAs applies again. State-level protections that cover the spouse’s own retirement assets also kick back in.
A direct trustee-to-trustee transfer is the cleanest way to execute the rollover. If you inherit an IRA from your spouse and have any concern about future creditor claims, completing the rollover promptly is the single most protective step available. Non-spouse beneficiaries cannot use this option and must leave the account titled as an inherited IRA.
Inherited 401(k)s and Other ERISA Plans Are Different
Clark v. Rameker is about inherited IRAs. Inherited balances that remain inside an employer-sponsored ERISA plan, such as a 401(k), 403(b), or traditional pension, follow a different rule. ERISA’s anti-alienation provision, 29 U.S.C. 1056(d), bars creditors from reaching plan benefits.4Office of the Law Revision Counsel. 29 U.S. Code 1056 – Form and Payment of Benefits Under Patterson v. Shumate (1992), ERISA plan assets are excluded from the bankruptcy estate entirely, and that exclusion extends to inherited accounts within those plans.
The catch is what happens when the beneficiary moves the money. Rolling an inherited 401(k) into an inherited IRA strips off the ERISA shield and lands the funds squarely in Clark v. Rameker territory. If creditor pressure is a real possibility and the employer plan allows a non-spouse beneficiary to keep assets in the plan, staying put can be worth more than the flexibility of an IRA.
State Law Controls Outside Bankruptcy
Bankruptcy is one arena. Ordinary creditor actions, like civil judgments and collection cases, are governed by the exemption laws of the beneficiary’s state. Protection levels vary widely.
Fewer than a dozen states have passed statutes that specifically shield inherited IRAs from creditors outside bankruptcy. Most states offer limited or no explicit protection, which means a judgment creditor may be able to levy the account. Because these statutes are state-specific and change over time, the only reliable way to know where you stand is to check your state’s current exemption law or ask a local attorney.
Even in states with strong protection, the shield covers only funds that remain inside the inherited IRA. Money withdrawn into a personal checking or savings account loses any special status, regardless of state.
The 10-Year Payout Rule Forces Exposure
The SECURE Act of 2019 changed how quickly inherited IRA money must come out. Most non-spouse beneficiaries who inherited from an owner who died on or after January 1, 2020 must empty the account by the end of the tenth year after the owner’s death.3Internal Revenue Service. Retirement Topics – Beneficiary Every dollar that leaves the inherited IRA lands in a personal account, and at that point any account-level protection is gone.
If the original owner died on or after their required beginning date, the beneficiary also has to take annual required minimum distributions in years one through nine, with whatever remains due at year ten. Those forced annual withdrawals push funds into reachable accounts on a set schedule, even in states that protect the inherited IRA balance itself.
The SECURE Act carved out five categories of “eligible designated beneficiaries” who can still stretch distributions over their life expectancy: a surviving spouse; minor children of the deceased (until the age of majority, when the 10-year clock starts); disabled individuals as defined under federal tax law; chronically ill individuals certified by a licensed health care practitioner; and beneficiaries not more than 10 years younger than the deceased owner.3Internal Revenue Service. Retirement Topics – Beneficiary These beneficiaries can leave more money inside the account structure for longer, which extends whatever creditor protection the account provides.
Inherited IRAs in Divorce
An inherited IRA is generally separate property in divorce because it came through inheritance rather than being earned during the marriage, and separate property is typically not divided in a settlement. That protection can be lost by commingling, though. Depositing distributions into a joint account or using inherited funds for shared household expenses in a way that makes the origin untraceable can convert the account into marital property.
State law controls how inherited assets are classified in divorce, and community property states can analyze the question differently from equitable distribution states. Keeping the inherited IRA in a separate account titled only in the beneficiary’s name, and documenting the inheritance origin, is the practical way to preserve separate-property status.
Using a Trust to Protect the Assets
The main estate-planning answer to Clark v. Rameker is naming a trust as the IRA beneficiary rather than naming an individual. The funds flow into the trust at the owner’s death, and because the beneficiary doesn’t own them outright, creditors generally cannot reach the trust assets the way they could reach an inherited IRA held in the beneficiary’s name. Planners commonly use a standalone retirement trust designed specifically to receive retirement distributions, with an independent trustee controlling the timing and amount of payouts to the beneficiary.
To work with the IRA distribution rules, the trust generally must qualify as a “see-through” trust under Treasury regulations. That means:
- The trust is valid under state law.
- It is irrevocable at the owner’s death, or earlier.
- Its beneficiaries are identifiable, specific individuals rather than open-ended classes.
- A copy of the trust or a certified beneficiary list reaches the IRA custodian by October 31 of the year after the owner’s death.
Within the see-through category, a conduit trust passes each distribution straight through to the beneficiary. That’s simpler, but the money lands in the beneficiary’s personal accounts where creditors can reach it. An accumulation trust lets the trustee hold distributions inside the trust, which gives stronger creditor protection but can trigger higher trust-level income tax rates. Since the SECURE Act compressed the payout window to 10 years for most non-spouse beneficiaries, accumulation trusts have become more attractive for protection purposes despite the tax cost.
Trust planning for inherited IRAs is not a do-it-yourself matter. The trust has to be drafted before the IRA owner dies, and errors in the language can disqualify it as a see-through trust, accelerate the distribution timeline, or fail to shield the assets from the creditors it was meant to keep out. Work with an estate planning attorney who knows both the tax distribution rules and your state’s creditor protection statutes.