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Estate planning: Update beneficiaries for retirement accounts

As you sit down to create your estate plan, you are probably thinking about who can best use the assets you have. While you are doing this, you also have to think about who will put your retirement accounts to good use after you are gone. A recent ruling by the United States Supreme Court might change how you decide who will inherit your individual retirement accounts when you pass on.

The ruling by the Supreme Court takes away the protection for inherited IRAs when the account holder files for bankruptcy. Previously, all IRAs were considered exempt from bankruptcy proceedings. Now, IRAs that are inherited are considered fair game for creditors.

This ruling came in response to a woman who was claiming the IRA she inherited from her mother, which is now worth $300,000, should be protected during her bankruptcy. She argued that it should be treated as a retirement account.

In a 9 to 0 ruling, the Supreme Court justices declined to see things her way. Their reasoning was simple. An inherited IRA can be cashed out at any time. The heir doesn't have to be of retirement age. Because of that fact, the justices ruled that inherited IRAs can be sold off to satisfy debts.

This ruling should remind you that creating an estate plan and designating beneficiaries isn't about a popularity contest. Instead, these estate planning duties should be done with a clear mind so you can leave them to the person who will ensure that they are properly cared for and used in accordance with your final wishes for the accounts and funds.

Source: MarketWatch, "Inherited IRAs lose bankruptcy protection" Jeffrey Levine, Jun. 13, 2014

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