Does an Inherited IRA Have Creditor Protection Status Under NJ Law

HNWEstate Administration and Probate, Estate Planning

Inherited IRA

  •  In some states creditors can seize an Inherited IRA
  • The IRS and Bankruptcy Court(s) can also seize an Inherited IRA
  • This article discusses inherited IRA’s under N.J. Creditor Protection Law

A recent Supreme Court decision held than an inherited IRA from a parent was a “retirement fund,” as was interpreted in the federal bankruptcy exemption statutes for retirement funds because the debtor could not (1) invest additional money in the account, (2) was statutorily required to withdraw money from the account no matter how many years she might be from retirement, and (3) had free access and ability to withdraw the entire balance without penalty. These characteristics of an inherited IRA said the court prevented the funds in an IRA account from qualifying as funds set aside for retirement, even though the debtor, by choosing to take only minimum annual distributions required by law, might be able to use them for retirement purpose.

The court’s decision means that an inherited IRA is not exempted from creditors’ claim if a person declares bankruptcy unless exempted under state law.

NJ Exempts an Inherited IRA from Creditor Claims

A bankruptcy court in New Jersey held that an inherited IRA fits in the creditor exemption status created under N.J.S.A. §25:2-1(b) that exempts a “trust created or qualified and maintained pursuant to federal law, including, but not limited to, section …408…of the federal Internal Revenue Code of 1986 (26 U.S.C.§…408…),” and doesn’t lose that status after being converted from a traditional IRA.  In re Andolino, 525 B.R. 588 (Bankr. D.N.J.2015), Judge Kaplan concluded that because New Jersey exempted inherited IRA’s like it did traditional IRA’s under its statues, it would not be part of the bankruptcy estate.

To discuss your NJ Estate Planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at  Please ask us about our video conferencing consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Estate Planning Attorney


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